Almost everybody has been given financial advice to create an emergency fund at some point or another. But have you ever thought why you should? Think about it, life is full of surprises, some of them might be sweet, some horrible. The loss of a job, a car accident, or a sudden illness may hit you or you might have a wedding to fund or baby to prepare for.
Plus, if you have a credit card debt or a housing loan to cover, you won’t be able to cease the payments your Home Loan EMI calculator predicted you’d need every month. In these cases, it’s always better to be financially prepared to handle different situations.
What is an emergency fund?
An emergency fund is a savings account, where you put money away for a time when you really need it. The most basic emergency fund should consist of at least three months of core expenses to help you tide over these situations.
Here are five life surprises that might motivate you to create your own emergency fund.
You might have health insurance already, but it doesn’t always cover the complete cost of your medical treatment. You need extra funds in case a family member is ill and needs an ambulance, physiotherapy, or even a surgery. And let’s not forget pets. If you don’t have pet insurance, a veterinary visit, especially during an emergency, can prove to be quite expensive.
Relocating to another city
At some point your company might ask you to transfer to a new office or you might get another job that could be in another city. If you’re lucky, your employer will help you with the moving expenses, but sometimes they will only pay one half or not pay at all. So, what do you do then? The cost of moving, setting up, and the cost of furnishing a new house can be hard on your bank balance. So, if you think there’s possibility of a career-related move, then get working on that savings account.
Loss of a job
Sometimes you could be laid off or you could leave for personal reasons. In either case, it is wise to have a fund to provide temporary financial stability, to help pay for your necessities. In case you have to repay a housing loan, an emergency fund might help you keep up with the payments, which include factors like the high Home Loan interest rates in India.
A sudden trip
In case you do lose a loved one in a different country, the last thing you need to do is worry about is the cost of travel. There could also be more joyous occasions such as the birth of relative’s child or a wedding. An emergency fund can stop you using your credit card and will help cushion the blow of what the trip costs.
If you use a vehicle of your own as your primary mode of transport, you know how much a kink in your vehicle affects your ability to go about your daily work. In these situations, you might have to replace parts for your two-wheeler or four-wheeler, and an emergency fund can help ease this stressful situation.
Having an emergency fund gives you the assurance of knowing that you will have some sort of cushion to lean on when times are hard. Remember to start off small when you’re first creating your emergency fund. Even Rs.100 a month can make a difference in the end.