If you have ever read a personal finance book, seen a television show about money managed, listened to a wealth advisor on the radio, or even talked to successful people in your own life, the odds are good that you are more than familiar with the idea behind an emergency fund. Why does your family need one and what is it?
The Short Answer: An emergency fund is an amount of money set aside that can be quickly and easily accessed when one of life’s curveballs comes your way.
The Longer Answer: It is only a matter of time before one of life’s unexpected expenses arises. First, let’s be clear on what constitutes an emergency. While it may feel like an emergency when the TV blanks out on Super Bowl Sunday, this does not constitute a financial emergency. An emergency is an event that threatens your well being, not your comforts.
Why Is It Important To Have An Emergency Fund?
One of the foundations of a strong financial blueprint is to carry little to no revolving balances such as credit card debt. Without the safety net of an emergency fund, people with insufficient cash on hand are likely to charge a financial emergency, such as a furnace repair in the middle of winter, on a credit card. This can create a cycle of debt that can be difficult to overcome.
Another principle for creating a sound financial future is to invest wisely. If cash is not available when one of these emergencies arises, and I say when, not if, you may be forced to tap into a long-term investment to cover the expense.
Carrying credit card debt or having to sell investments prematurely can make it significantly more difficult to create wealth and become financially independent.