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Have you ever found yourself in a situation where an unexpected expense came up and you didn’t know how you were going to cover it? Maybe your car broke down, your pet got sick, or you lost your job. Whatever the reason, it’s never a fun experience and can cause stress and anxiety. That’s where emergency savings comes into play.

What are Emergency Savings?

Emergency savings, or a rainy day fund, are savings set aside specifically for unexpected expenses such as medical bills, car repairs, or other emergencies. These funds are not should not be used as a secondary savings or for discretionary purchases. Instead, they are strictly reserved for emergencies.

📄💸 One good rule of thumb is to save three to six months’ worth of expenses in case of an emergency or other unexpected financial need. So, if your monthly expenses are $3,000, your emergency fund should have at least $9,000 to $18,000 in it.

Why Do You Need Emergency Savings?

Having emergency savings means that you can handle unexpected expenses without having to go into debt or liquidate other assets. This type of savings allows you to focus on more important issues without worrying about how to cover the expense. This takes away the constant stress about paying for unexpected events.

🌟Here are several reasons why emergency savings is essential to your financial wellness and peace of mind:

Peace of Mind

Having emergency savings provides significant peace of mind and helps to alleviate anxiety and stress that comes with the unexpected. Fear and anxiety cause us to do irrational things that can negatively affect our life, such as making rushed decisions, taking on unneeded debt, or liquidating valuable assets, etc. Having emergency savings ensures that you are covered when an unexpected expense arises.

A person sleeping soundly in bed

Healthier Finances

If an unexpected expense comes up, you will be tempted to borrow money to pay for it. This will leave you with future payments added on top of your monthly expenses. If you need to borrow money, you may have to take out a loan, or increase your credit card balance, making it difficult to stick to a budget and keeping yourself financially healthy. An emergency fund helps to provide a way to handle unexpected expenses and help you to stay financially stable.

A person happily looking at their bank account balance

Help Plan for the Future

Unforeseen events can happen to anyone at any time, so they should always be factored into your long-term financial plan. While making out a budget and setting goals, an emergency fund should be a part of your financial plan. Saving starts small, but when you establish a habit of putting money into your rainy day fund each month, this can help you to prepare for the unforeseeable future.

A person planting a tree (representing the idea of planting for the future)

Where Do You Keep Your Emergency Savings?

Federal Deposit Insurance Corporation (FDIC)-insured savings accounts or money market accounts are among the safest places to keep your emergency savings. A savings account or money market account is a more flexible place to store your money.

When storing your emergency savings, keep a record of your account, track your contributions, avoid tempting withdrawals, and continue to build on your savings.

🤓 Top Tip: While investing in the stock market can bring good returns, it is a very risky part of your savings. You could lose all your funds in a market downturn, or sell at a loss to access funds during an emergency. It’s better to leave the investment outside of emergency funds. When an emergency happens, you should have some money you can liquidate at maximum liquidity.

Conclusion

Having emergency savings allows you to handle the unexpected with ease, maintain financial stability, and have peace of mind. By establishing an emergency fund, you put yourself in a position to be financially healthy, alleviating stress and anxiety that comes from unexpected circumstances.

🌟 Remember, it’s never too late to start saving. Set simple goals, work to increase your savings, and seek advice from professionals. The control you have over your finances today can greatly impact your future.

A group of people smiling, representing the feeling of security and happiness with emergency savings