Introduction
An emergency fund for a peaceful financial life is necessary. A peaceful life consists of many factors. It includes health, relations, inner peace, money and many others. Some people value one factor while others see it differently.
In any walk of life, money is the most important factor. That’s why a lot of research has been done on the question: Can money buy happiness? Irrespective of, if money can buy happiness or not, the most important factor that can provide you with a peaceful financial life is an emergency fund. In this article I would like to bring it to your attention that how having an emergency fund can relieve you of many worries and it is necessary for your peaceful financial life.
What YOU Should Know
Definition and Importance
An emergency fund is a dedicated savings account for unforeseen expenses like medical bills or car repairs. Having such a fund is crucial to avoid financial distress.
Psychological Benefits
An emergency fund reduces stress related to unexpected events, preventing psychological effects like availability bias and focusing illusion.
Adequate Fund Size
The recommended emergency fund size is 3 to 6 months of living expenses, adjusted based on spending habits and family size.
Building the Fund
Set a clear savings goal. Save monthly or biweekly, and consider automating payments to ensure consistency and discipline.
Separate Accounts
Keep the emergency fund in a separate account from regular savings to avoid temptation and ensure it is available only for true emergencies.
Emergency Fund: What is it?
An emergency fund, like it is evident from the word, is a money pot that can only be touched if an unforseeable situation occurs in your life. The unfortunate situation can be a car repair, a phone screen repair, a traffic ticket, medical services fee or perhaps a layoff. Any of the mentioned situations based on the severity of the event can be different. More on Financial Management for Families Here!
| LOW PRIORITY (Value) | HIGH PRIORITY (Value) |
| Phone | Medical Bills |
| Traffic Ticket | Car repair |
In the above table, without having a money pot with a handsome amount can be devestating for any individual or a house holder.
Emergency Fund: Psychological Effects
Any situation that is out of syllabus or that was not expected but has arrived at our door disturbs us. How does it disturb us? Lets find out
Availability Bias: I am losing my mind
Everyone’s life is connected to different people and with this dependency comes different stories. Human mind is constantly updating it’s storage with examples of events happening around us. These examples/stories are very important because with every story comes a conclusion that the human brain automatically generates.
For our discussion, Michael is doing his job and ennjoying his life. He is going to work and then coming back home, eating, watching TV and sleeping. On weekends he is going to his friends and he enjoys the evenings out. Prima facie his life seems good and predictable. One day out of nowhere he is served a termination letter and he realises that he has no money saved to pay for the month’s rent, groceries as well as fuel. Though he has money for the present month.
So, he is your friend or friend of friends and you get to know his story and your brain percieved it as a dreadful story and saved it. Now, you face the problem of a car repair and you have to use that car for commuting to your job.
You also have no emergency fund because you have spent almost everything that you earned. Your brain will immediately bring the story of Michael and might make it’s variation to fit your circumstances. Even though your situation is rather easy because you can borrow this money from a friend or relative and give them back next month but your brain will trick you to exaggerate the problem and you will feel overwhelmed with no peaceful life, hence financial stress will disturb your mental well-being.
Focusing Illusion: I can’t handle Financial Stress
If someone asks you today, how are you feeling? Your brain will recall the recent change that happened in your life. This event can be work related or relationship related. Your answer is bound to change because that event just altered your thought process without even you noticing about it. If the event was positive, you will answer with a smiling face (Positively) and if the event effected you in a negative way, you answer will be sad or not so positive. This is called as Focusing illusion.
Debt repayment date is coming and you are short on payment, your everyday life will be disturbed, you will be thinking about the payment date and your thinking will be so focused that you will weight this event more than any other event, however positive it is.
Had it be you having emergency fund, you would have been happier and mentally healthy. By looking at the above human psychological lapse, we can certainly think of the benefits of having a money pot, saving you from unfortunate events.
Emergency Fund: How much is enough?
What should be the amount of emergency funds is dependent on how you spend your money. Are you a spendthrift or are you a minimalist? Lets look at it.
| Spendthrift | Minimalist |
| Food | Food |
| Rent | Rent |
| Fuel | Fuel / Transport ticket |
| Subscriptions (Multiple same category (Media)) | Subscriptions |
Depending on the situation: Single or Family, the amounts will also include the dependents in family category. The lower threshold is 3-months for emergency Funds and the upper threshold is 6-months amount that should be put aside and remain untouched.
Emergency Fund: How to do it?
Like any investment, emergency fund can be treated like an investment fund and can be built over time. People who invest in etfs should know how to build an emergency fund. Most of the people coup with the problem of putting this amount aside as it can be a big amount.
Calculate the amount according to the category: Family or Single, then set the amount as your goal and create a schedule.
The easy way to do it would be to save monthly towards your emergency month if you receive monthly income or biweekly in other income areas. The monthly installment can be increased if you receive a bouns. You would thank yourself latter, if you make automated payments toward emergency fund.
The most important point is to put it in an account that is not your regular account. The account should not be checked daily or weekly. It is better to check on a monthly basis to have an idea of the goal that has already been achieved.
NOTE: The money is not your regular savings and should not be used for buying gifts for yourself or for others.
Conclusion
An emergency fund is not just a financial safety net but a crucial tool for maintaining mental well-being and peace of mind. Financial stress can have severe psychological impacts, from making minor issues feel insurmountable to skewing your perception of daily events.
By establishing an emergency fund, you create a buffer against life’s unexpected challenges, ensuring that you can address unforeseen expenses without falling into debt or experiencing undue stress. Whether you are a spendthrift or a minimalist, setting aside three to six months’ worth of expenses in a separate account can make a significant difference in your financial stability and overall happiness. Start small, set achievable goals, and automate your savings to build this essential financial cushion. In doing so, you are not just investing in your financial future but also in your peace of mind and quality of life.
