What is an emergency fund? An emergency fund is also known as “rainy day fund” or sometimes “savings buffer”. It gives you some breathing room during struggling bumps in the road or every unexpected expense.
When a person or business goes without an emergency fund, it is like operating without any savings. But with an emergency fund, you can be protected from all of your unexpected expenses that may occur whether big or small.
Having an emergency fund is a great strategy if you want to be free from debt or get out of debt. When you encounter a bump in your financial road, it can be a great help. It can help cover the things you don’t budget for like car repairs or medical costs. You can use your emergency fund to handle these stressful events and make it easier for you to stay focused on getting out of debt.
Another advantage of having an emergency fund is that it allows you to cover some of the expenses that are left out before you start budgeting. Why do you need an emergency fund when budgeting? When you first start budgeting, you may be leaving out some of the expenses that you need to plan for. Your emergency fund can cover some of these expenses the first year, and then you can add those expenses into your budget as they come up.
Do you only have one source of income? If you do, it can be difficult for you to manage your finances especially if your source of income is not that stable. But with an emergency fund, it can help you get through an unexpected job loss or illness that keeps you from working.
If you have medical condition, especially if it is serious, having an emergency fund is essential. Serious medical conditions can cause you to max out your deductible annually. A well-funded emergency fund can help you deal with these costs and make it easier to get through these challenging times.
There are many other reasons why having an emergency fund is important. For more on how to build such kind of fund, read this: https://www.moneysmart.gov.au/managing-your-money/saving/building-an-emergency-fund