When you are budgeting your finances, one of your first priorities should be saving money each month to build an emergency fund. Many experts recommend trying to save as much as three to six months’ worth of expenses so you have a cushion in case of major expenses. There are some major benefits to building an emergency fund. Here are three of them.
Helps you avoid taking on debt
Some forms of debt are worth having, such as mortgages and student loans. But having to put medical expenses, car repairs or a new furnace on a credit card isn’t such a good idea. Credit cards carry high rates of interest, often 15 to 20 percent or more, which means whatever expense you have to pay for with them will cost you much more in the long run. And if you can’t afford the expense in the first place, you might not be able to afford the monthly payments, which could lead to late fees and a reduction in your credit score.
Gets you into the habit of saving
Another advantage of building an emergency fund is that it gets you in the habit of saving. Having a goal and putting a certain amount of money toward that goal each month will ensure that you build your emergency fund. The best way to work toward your goal is to work on it in increments. Don’t make your goal six months of expenses; start with one month. Then once you reach that goal, you can work toward your second month. The key is to not stop your savings or take money out of your emergency account for any reason other than a true emergency.
Can help you find ways to cut money from your budget
When you are forced to save for a specific purpose such as building an emergency fund, it can help you find sources of frivolous or excessive spending that you can cut out of your budget. Examples include too many lunches or dinners out, overpaying for cable, Internet or cellphone service or paying for a gym membership you don’t use. Trimming unnecessary spending from your budget can free up extra money to help you build your emergency fund faster or to save for other things, such as retirement or a college fund for your children. That’s a tremendous benefit that can be a side effect of building an emergency fund.
These and the other benefits of building an emergency savings fund are why it is such an important goal. One thing to keep in mind with such a fund is that you keep it in a liquid account, such as a regular savings account, and invest it conservatively so you can protect your principal.