Emergency Fund: Should I Have One?

There was a point in my life where I thought that having an emergency fund was like taking away my money, but soon I realised it is the other way round. Having an emergency fund is more beneficial than you can imagine.

For example, if an emergency happened that cost you around $1000 – what would you do? No big problem. What if you’re like thousands of other Aussies without car insurance when your car breaks down badly (ie. your timing belt goes!) — what is your financial response? Do you have enough in your everyday money to absorb the cost? Consider, what happened if you needed to suddenly travel interstate or overseas? What if you loose your job unexpectedly? There are plenty of unique scenarios which happen at the drop of a hat.

Be wise with your money and don’t assume that you will cruise through difficulties. For some who are clever enough to have an emergency fund, they can easily pay off the emergency and perhaps still have some left over. But what about those who don’t have an emergency fund? Therefore, we can divide it into two categories, one is those who pay interest and another is those who earn interest.

Paying Interest

This category applies to those who depend heavily on credit cards. In this case, you use the credit card to pay for the $100 emergency. Your credit card is the fastest way to solve any emergency situation that involves money. However, credit cards can have negative effects on your long-term financial plan especially if you don’t have the best credit card suited to your financial abilities. Lets say you manage to pay the $1000 emergency on your card, but you will have to bear the burden of paying back to the bank not only of the $1000, but also the interest. The percentage rate ranges between 10 – 20% per year, so can you imagine how much the interest adds up if you don’t pay it back within a few months. Look for a balance transfer credit card with a low ongoing interest rate if you’re needing to get a better deal than what you’re currently getting.

Therefore, while you are still paying for the first emergency, you don’t manage to save for the second emergency. Then when the second emergency happens, you will have to borrow again, and that adds up to your burden. Then the cycle is repeated when you are still trying to pay for first and second emergency; you don’t have any credit to absorb the third emergency and your debt is going up to a point that I am sure you don’t want to think about! Okay – so three bad things happening in quick succession…unlikely I know, but be prepared.

Earning Interest

This category applies to those who are clever enough to understand the importance of having an emergency fund. They put aside a small amount of money every month, lets say $100. Then as the time goes by and first emergency happens, you don’t worry much because it can easily pay the $1000 emergency, and perhaps some of them might have that balance in their fund, so they can continue to save for the second emergency while at the same time, earning the interest from the bank. This is a prudent move that everyone should make. Now, when the second emergency happens, again they don’t have to fret. They easily settled the second emergency and this time, as usual, they might have even more money remaining in the fund – and they keep on saving and earning interest. Look for savings accounts with as high interest as possible which can accessed at any time.

So, in conclusion, I shall add that for just a small amount of around $100 every month, you are on your way out of any financial burden and heading towards a peaceful and more organised life.

1 Comment

Filed under Savings

One response to “Emergency Fund: Should I Have One?

  1. Pingback: 4 Ways to Fix Your Over Spending From Christmas 2008 « One Dollar More

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