The Importance of an Emergency Fund

A significant part of a household budget is the establishment of an emergency fund.  Life is full of unexpected events, those which pop up at the most inopportune times.  While we cannot possibly predict the timing or magnitude of every possible emergency, we can allow for such in our financial planning by establishing a fund to accommodate unexpected expense.  Following are considerations you should entertain in planning and amassing your own emergency account.

How Much?

A good rule of thumb is to maintain and emergency fund of $1,000.  If you don’t already have an emergency fund, begin to set aside what you can toward this goal.  Further, include an emergency category in your household budget, so that you continue to set aside emergency funds once this goal is met.  As emergencies arise, you will not have as much trouble replenishing the fund, if you’ve continued to increase it after attaining your $1,000 goal. 

When To Use Emergency Money?

Not every big, unexpected expense is an emergency.  That discounted power tool at the home store, the flashy dress on sale at the mall, these are not needs.  Further, expenses such as automobile repairs, medicines and doctor visits, and broken appliances, are examples of expenditures that can be anticipated to some degree.  These categories should fall within your budget as categories unto themselves, and when expenditures are necessary, they should first be met through allocated funds.  If such expenses exceed the budgeted money, this is the point at which the emergency fund comes into use.  Often, the auto repair funds will cover something simple.  However, a blown engine is less anticipated, and much more likely to exceed what has been pre-designated for auto repairs.  At this point, the emergency fund may come into play. 

Increasing the Fund?

Instability in the economy has placed many people in vulnerable financial positions.  Not only are wages being cut, employees being furloughed, and workers being laid off, but also, people are encountering higher costs on smaller quantities and lesser values in food and other products.  The financial atmosphere has wreaked havoc upon many families’ best intentions to budget.  In the midst of this time, do your best to stay afloat, and when circumstance improves, aim to set aside not only your basic emergency fund, but also increase that goal as you are able, in order to prepare for potential future declines. 

Emergency funds are those set aside to provide relief in the midst of the unexpected.  A household plan should include anticipation of some specific events, though their occurrence will not necessarily be predictable.  The emergency fund is meant to cover those expenses which are necessary, unexpected, or which exceed that which has been anticipated.  By maintaining an emergency fund, you will avoid unnecessary debt, and provide further economic stability for yourself and your family.