In today’s finance world, many people use the phrase emergency fund a lot. According to a FINRA study, 56% of people in the united states do not have an emergency fund that would last at least three months. You may ask, what is it? What is the importance of an emergency fund before investing? Today, I want to talk to you about how to build your emergency fund before you start investing in the stock market. While I have encouraged you all in the past to invest, I also want to make sure you are saving first.
THE UNEXPECTED EVENTS
Life can throw many surprises at you, so having an emergency fund set aside can help you cover the unexpected costs. These unexpected events can be costly and extremely stressful. Some of these events include job loss, medical condition, home repairs, car troubles, etc.Below are two reasons why you should have an emergency fund before investing:
- It stops you from selling your investments during a market downturn. The stock market is unpredictable, and no one knows what will happen tomorrow. Thus, it will be unwise to keep the money you need to fund your daily life in the market. Doing so creates a scare and may cause you to make immature decisions.
- It allows you to contribute more money towards your investments. Investing with your emergency fund secured is a different feeling. Think about a situation where you have about six months of savings towards unexpected events. It puts you in a position to invest aggressively in the market with the extra money you would have put towards your savings.
Besides investing, below are other reasons you want to be sure you have an emergency fund:
- It reduces stress. Let’s think about this for a minute. If you are living with no safety net, you are living on the financial edge. If an unlikely event happens, you are likely to be in a stressful situation. Having an emergency fund allows you to be confident when such things happen.
- It reduces your chances of taking on new debt. If your car breaks down without a financial safety net, it may cause you to apply for an auto loan. Taking on more liabilities can hurt your abilities to build wealth earlier.
In summary:
- You should have at least 3-6 months worth of expenses in your emergency fund. Some people have at least a year.
- Keep the funds in an online saving account with high interest, or money market accounts with high interest and minimum accessibility.
- While saving, you should also consider paying off any high-interest credit card bills because that may limit your ability to save more than you want.
- Disclaimer: I am not a financial advisor. The information provided is all for informational and educational purposes.
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