What is an Emergency Fund – Why Do I Need an Emergency Fund?

What is an Emergency Fund? Why do I need an emergency fund? This and many more, you’ll find answers to in this article.


Emergencies are unpredictable. They happen when we least expect them or are not prepared for them. Some emergencies like a sudden health breakdown or roof damage in your home may occur. And at such times when you don’t have money to pay the medical bills or cost of repair, it could leave you running helter-skelter.

What is an Emergency Fund

But with money in an emergency fund, you can take care of those costs. An emergency fund is a cash reserve. It’s just like a savings account you’ve dedicated to keeping funds in preparation for emergencies. So, when emergencies come, you won’t be caught off guard.

Well, unlike your checking or savings account, the money you keep in your emergency fund should be reserved. You shouldn’t just withdraw cash from it until you are in a time of serious financial need or distress.

What Can the Money in an Emergency Fund Be Used for?

Just like the name implies, money in an emergency fund is for unplanned expenses. Money in an emergency fund can be used for payments that are not a part of your regular monthly spending routine. When a financial surprise happens, you can use the money you’ve saved in your emergency fund to take care of any costs involved.

Some financial expenses that you might likely face are

  • Unexpected travel expenses.
  • Dental or medical emergencies.
  • Car breakdown or a faulty tire.
  • Unexpected home repairs or replacement.
  • Loss of job.

Why Do I Need an Emergency Fund?

Having an emergency fund keeps you out of debt. Instead of borrowing money from family, friends, or other lenders, you’d be able to cover costs yourself. Moreover, any reason for having an emergency fund is to improve your financial security.

What are the Benefits of Having an Emergency Fund?

As earlier stated, having an emergency fund keeps you financially secure and prepared for unforeseen expenses. However, asides from this, an emergency fund also helps to keep your stress level down. It gives you the confidence that you can deal with unexpected events. So, you don’t have to worry about adding money worries to your list.

In addition to this, it also prevents you from making bad financial decisions. When something unexpected happens, if you don’t have an emergency fund, you could resort to other ways to quickly get cash. This includes taking high-interest loans. And repaying this loan could be difficult.

Also, an emergency fund keeps you from spending carelessly. When you keep these savings far from your reach, you won’t be able to spend them when the urge just comes.

How Much Should I Have in an Emergency Fund?

No specified amount of money should be in an emergency fund. The amount you should have depends on your financial situation, income, and living expenses. If you don’t know how much you should save in your emergency fund, you can think about how much it has cost you in the past to pay for unexpected expenses.

This will help you to set saving goals to get the money you need. You can try saving up to three to six months of your living expenses.

What is the Best Place to Keep an Emergency Fund?

There are so many places you can keep your emergency fund. However, when deciding this, you’d want to ensure it’s accessible and safe. Also, you should ensure that while it’s accessible, it should be in a place where you’d not be tempted to use it on non-emergencies.

However, there are some good options where you can keep your emergency fund savings. This includes

Savings Account

You can also keep your emergency fund savings in a savings account with a high-interest account. Because you could be tempted to use the money at any time, this savings account should be different from your bank account. You can make use of a high-yield savings account.

Money Market Account

This is also one of the best options for you to put your emergency funds in savings. Money market accounts offer higher interest rates than savings accounts. They are also secure and easily accessible.

Prepaid Card

This is a card that you can load money into. Prepaid cards are not connected to your bank account or credit union. You can keep this card with you and withdraw from it when there is an unexpected expense.

Credit Union Account

This is one of the safest places to keep the money. There, you can keep and maintain the funds properly without being tempted to spend them.


This is also another option. Rather than save the money in an account, you can hold the cash. But the drawback with this option is that you might be tempted to spend the money at any time. However, to avoid this, you can keep the cash with a trusted friend or family member.

How Do I Build an Emergency Fund?

Effectively building and managing an emergency fund requires some strategies. You can start by estimating the amount you want to save. Then set realistic goals to achieve savings.

Create a system to make contributions consistently. You can automate your contributions to make it much easier to save. And don’t forget to also track your progress.

When Should You Use Money in an Emergency Fund?

You should only use money in an emergency fund when it’s necessary. At times, an expense may pop up but it might not truly be an emergency. However, before you use money in your emergency fund to pay for any expense, you have to ask yourself these questions. Is it necessary? And is it urgent?

How Can I Build an Emergency Fund if I’m Living Paycheck to Paycheck?

Living paycheck to paycheck comes with a lot of disadvantages. And one of them is that it makes it difficult to save. So, building an emergency fund could be difficult if you are in this situation. However, you can dedicate a small percentage of your salary you can do without every month. And be committed to it.



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