The Importance of Emergency Funds

Sometimes, It doesn’t just rain, it pours. When one thing goes wrong, everything else follows suit. Your boiler is on the blink. Your car has broken down. Your smartphone has water damage (and lying it on rice just won’t fix it). Then, to make matters worse, you realise that you don’t have an emergency fund on standby to cover all of these expenses.

It’s true, it's so important to have emergency funds and if you don’t, then you need to either begin building a nest-egg today or you need to know what financial aid you can turn when you find yourself slap bang in the middle of an emergency. You can find information on doing both below.

How to build an emergency fund

1. Set up automatic transactions to your fund

When you begin building an emergency fund, all of a sudden, you have this extra pile of cash lying around, and it’s easy to start dipping into it to pay for your living expenses and discretionary purchases. 

When this happens, however, you defeat the object of saving for an emergency fund in the first place, you will never have a chance of building it up in the long run, and you need to do something about it. What you need to do is make sure the money you designate from your paycheck each month is automatically transferred straight into your emergency fund, which should be an account that is difficult to access. This will stop the money from accumulating in an area that is easy for you to dip into.

2. Know where you stand in regards to your retirement accounts

When an emergency strikes, you will not have the time, the patience or the state of mind to begin messing around with your retirement accounts. So, you should make sure you know where you stand in regards to withdrawing money out of them early, and you should make sure you know how to do this as soon as possible. 

Set up a meeting with your financial planner to discuss the protocol of taking out a loan from your pension account and how you would go about withdrawing from your IRA early. Doing so will save you a lot of stress during the already very stressful time of an emergency.

3. Make sure you contribute towards your retirement accounts

That being said, you will not have anything to withdraw or loan from your retirement accounts if you do not continue to contribute to them. So, make sure you are putting money into them after every paycheck that you earn, and make sure your employer is contributing too. The benefits of investing in this particular way are massive, as you’ll build up your old-age nest egg, you’ll reduce your taxable income and you’ll top up your emergency fund.

4. Cut down on costs

The best way to save money and put it aside for a rainy day is to not spend so much when the sun is shining down on you. Before you ask, no, this doesn’t mean that you should sacrifice having fun for the prospect of having to pay for emergencies that might not come, this just means cutting down on costs when you can. Just think about it, do you really need to be spending all that money on Starbucks each week, or would a standard cup of good quality instant coffee made at home and popped into in an insulated cup for your commute do the trick some days?

Where to turn for help when you don’t have an emergency fund

1. Cash advance from a credit card

Having a credit card will, more than likely, cover you when you are a little short on funds. Some establishments, however, will not accept a credit card as payment,and will expect the money they are to be paid upfront, either in cash or via debit card. You could seek a cash advance from your credit card.

Doing this is simple, you simply use an ATM to withdraw funds from your credit card. Obtaining your credit card pin, however, is not always so easy to do. Most of the time, you will have to call your card provider’s customer service line or visit its online portal — this is done to protect your finances from the possibility of credit card theft.

When you do take out a cash advance from your credit card, try to keep the money you draw out to a minimum. You still have to pay off the money you borrow by your deadline imposed to do so, and you still need to pay all of your interest rates. So, don't get spending your cash advance freely and only spend the amount that your emergency dictates that you spend.

2. Take out an installment loan

If you haven’t got a lot of equity or a strong credit history, and the emergency you face is asking a lot of you in a financial sense, then taking out an installment loan could be the best option for you.

As stated in this complete guide on the matter, installment loans are perfect for consumers without a lot of up-front capital, because they allow them to repay the money they borrow over time, rather than by one, fearful deadline. This deadline can be within a few months, or it could even be 30 years away, so, if you need some money to tide you through your time of emergency, consider taking out an installment loan.

3. Reduce withholdings

Your withholdings are those payments that you make from your paycheck, such as the one you make to your country’s tax department. If you are in desperate need of doing so, you can reduce these withholdings over a period of timeby increasing the number of allowances that you claim. You will have to up your withholding payments again in the future, but lowering them during an emergency is a surefire way to help you get through it. Speak to your accountant or financial adviser for more information.

To deal with your next cash crunch, make sure to build yourself an emergency fund and make sure you know where to turn should you need assistance with it.