Family / 20th December 2020

What Should You Do if You Need Emergency Funding?

Having an emergency fund is a pragmatic way to cover unexpected expenses that may leave you in a financially straining situation. For one, turning to an emergency fund can save you from financial stress, which could stem from losing one’s job, or becoming sick and unable to work temporarily. There are different ways to source emergency funding—typically maintaining a fund for yourself, or obtaining an urgent loan, which can keep you afloat during difficult times. To find out more, read on.

What is an emergency fund, and what is it for?

Simply put, an emergency fund is there to help you pay for unexpected expenses and protect your finances. While this may seem straightforward, it’s crucial to determine what a financial emergency is and what’s not, so that you can put your priorities in order.

An emergency fund is used for unexpected major expenses that require you to use the money immediately. Here are situations where it would make the most sense to use your emergency fund:

• Sudden job loss
• Medical emergencies
• Unexpected home repairs
• Last-minute bookings for travel emergencies
• Family emergencies wherein you need to take time off work

On the other hand, an emergency fund probably shouldn't be used for:

• Booking sale airline tickets
• Elective healthcare such as plastic surgery
• A desire to buy a new appliance without a real need for replacement
• A new car or home purchase

Why should I have an emergency fund?

Experts believe that you should have an emergency fund worth at least three to six months of living expenses, which you can access during an unexpected financial blow. It’s an ideal strategy for anyone, but here are some specific reasons you might want to look into it.

You're living on your own – If you own your own home, it’s essential to have an emergency fund as owning a home is an investment that requires general upkeep. It’s inevitable to encounter issues such as plumbing repairs, electrical issues, and remodeling needs, so you need to have a fund to cover these costs when they come up.

You only have one source of income – If you're someone who relies on one source of income, it may be advantageous to build a substantial emergency fund which can cushion your expenses if that income were to halt. An emergency fund will help you keep up with your bills until you can find new income.

You’re dealing with a medical issue – Dealing with medical conditions can max out your resources quite quickly and may even force you to use up all your sick leaves and take days off with no pay. Through an emergency fund, you can cover expenses to cover your routine medical tests with ease.

You want to save – Savings are different from an emergency fund. While emergency funds are used for unexpected expenses, your savings are used towards a goal you’ve set yourself. Whether that may be starting your own business or acquiring a property, you should have a separate savings fund which can help you reach your long-term financial goals. Having a separate emergency fund can stop you from touching your savings when faced with a big financial hurdle, so you can leave that money for your planned purchases.

How can I start building an emergency fund?

• Start small – emergency funds will vary for every person depending on one’s situation. A well-funded emergency fund is ideally three to six months’ worth of your living wages. However, you don’t need to build them all at once. Start small and then build your emergency fund up towards your goal. The trick is choosing a regular level of contribution toward the fund that you can maintain.
• Create an additional stream of income – a great way to start building your emergency fund is to find other ways to earn more money. If you only have one source of income, it’s good to look for a side job so you can achieve your financial goals quicker rather than squinching your budget to unrealistic standards.
• Save for life – put any extra money aside for the rest of your working life. Trust us, you will thank yourself later!

What are my options if I don’t have an emergency fund?

If you haven’t had the chance to build your emergency fund just yet and a sudden emergency comes up, don’t panic. There are options you can investigate to assist you.

• Streamline your budget – cut down on discretionary spending such as shopping, eating out, and travel. You may even be able to get a refund on bookings or vacation plans if you’re forced to cancel.
• Refinance your home – if you have good credit, you can look into refinancing your home or property at a lower interest rate, so you can save money over time.
• Borrow from your investments – if you have a retirement fund or other long-term investments, you can pull money out of these accounts. Always remember that this should be your last resort, as you’ve worked hard in growing these investments.
• Ask for assistance – reach out to trusted lenders who can help you obtain short-term funding or assistance without pushing you further to bad debt. Working with an expert to tailor a plan for you can reduce the long-term impacts of borrowing, and minimise any hardships you’re already facing.