5 reasons to create an emergency fund

An emergency fund is essential for those looking for more financial peace of mind. One of the first pieces of advice any financial manager gives to anyone who is starting to organize their money is to create an emergency fund.

This reserve fund guarantees security in more difficult moments in life, such as unemployment or unexpected health expenses.

However, many people put off the task of creating a financial reserve fund because they believe it is difficult to save or simply prefer to rely on luck.

To better understand this concept and its importance for your life, continue reading.

What is an emergency fund?

As the name suggests, an emergency fund is the savings made to cover your fixed monthly expenses for a certain period.

It should be used in times of financial difficulty, so that you can have more security and peace of mind when you need money.

As important as increasing your earnings and investing your capital is building an emergency fund.

So, if you are investing in financial education and are starting to worry about the future, be sure to save money for these difficult times.

Who should have an emergency fund?

Everyone should have an emergency fund – no exceptions.

Ideally, it should cover at least six months of your fixed expenses.

We cannot avoid certain events, but we can reduce the damage caused.

If you need extra money and have an emergency fund, you won't need to resort to overdraft, which has very high interest rates and can further disrupt your finances.

Why should you have an emergency fund?

Now that you know what an emergency fund is, it's time to learn the reasons why you should start saving part of your salary every month:

1. Greater control over your financial life

There are people who earn a lot of money. Even so, they are always in debt and at the end of the month, they have to rely on their overdraft or on help from friends and relatives.

This happens because these people don't have the habit of saving money!

Before anything else, it is important to mention that when we talk about building an emergency fund, we are also talking about in planning.

Understanding this idea is essential to put aside the immediate behavior that makes you spend money on unnecessary things.

At certain times in your life, you will need to count on some extra money. And if you have created the habit of saving a little bit of your salary every month, you will get through these moments with more peace of mind.

2. Stability in the face of the economic scenario

The person most responsible for managing your finances is you.

However, there are things you cannot control, such as economic crises.

In 2020, the importance of having money saved for emergencies became more than clear.

In times of crisis, people have to deal with problems such as unemployment, rising inflation and other unexpected expenses.

If you have an emergency fund, you will feel more secure, as the money saved will offer you more peace of mind and comfort.

3. Professional freedom

 Those who have money saved have more freedom when making choices.

If you want to leave your current job but don't know how you'll support yourself if you quit, start by building up your emergency fund.

When you are more financially organized, you can quit a job or even, change careers.

As you already know, everyone needs to have an emergency fund. However, self-employed professionals should pay more attention to their savings.

Saving money brings more financial balance and freedom in your career. You need to think about what you will do if you have to stop working for a while.

Therefore, if you are looking for more professional freedom, you can be sure that the financial reserve will give you more peace of mind and autonomy when it comes to changing the course of your life.

4. Preventing debt

Debts cause worry, problems with family members and hinder your professional freedom.

When a major unforeseen event occurs and impacts your finances, you need to have money to resolve the situation.

If you don't have an emergency fund that you can withdraw at any time, you will need to take out a loan, which will make your life even more difficult.

And this is one of the reasons why it is worth creating your emergency fund, as this way, you will be able to stay well away from debt.

5. Encouraging investment

Not all successful investors started at the top.

Many of them started by creating an emergency fund when they still didn't have much money to invest.

In fact, there is something better than just saving money: saving and investing at the same time.

So, in addition to increasing your financial security, you start to earn income, which when accumulated over time, can become a source of passive income.

But since we are talking about an emergency fund, it is important to remember that this money needs to be available to you when you need it.

In other words, in this case, it is necessary to prioritize daily liquidity, which is the possibility of withdrawing your money at any time.

But if you're thinking about savings, you're wrong! After all, although a traditional bank account offers daily liquidity, it's not the best option when it comes to income.

Therefore, if you want to save money and invest at the same time, it is worth keeping your financial reserves in digital banks (such as the Nubank account, for example) and in some fixed income investment modalities, such as CDB and Tesouro Selic.

Conclusion

Building your emergency fund is essential to ensure your safety and peace of mind now and in the future.

The sooner you start, the better!