The Importance Of Emergency Funds During A Health Crisis

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For the last two years, the world has been challenged by a major health crisis! The wave of the COVID-19 pandemic hit all of us in the most unexpected and unprecedented way we could ever imagine. It affected our daily lives and hindered all of our activities. It also affected the economic state in every country and caused damages in every industry, especially the health and tourism department.

But it taught us a lot, especially to always be financially ready to fight such situations. Not everyone was prepared to face such a huge financial challenge. Some lost their jobs, impairing their income flow, while others got infected with the deadly virus, leading to unbearable financial expenses.

That is where emergency funds come into play. Why is having an emergency fund crucial during the crisis? What does it imply, why is it essential, and why do most people not have it?

Breaking Down The Anatomy of an Emergency Fund

Let’s break down each of the questions raised above about why an emergency fund is essential.

What is an emergency fund, and why is it important?

It’s imperative to emphasize the actual definition of an emergency fund, and as many financial advisors would like to call it, it’s a personal safety net. An emergency fund is a form of saving where people invest money to only use during emergencies or financial distress.

The critical role it plays is that it will be the only financial access available to the person whenever they need additional financial help. An emergency fund is not to be accessed whenever finances come short or when the budget goes out of hand. It should be kept intact to utilize during the most distressing period, like a health crisis.

But why are there many people who don’t have an emergency fund?

Many financial institutions and financial experts claim that at least 25% of Americans don’t have an emergency fund. In comparison, approximately 51% only covers less than three months’ worth of emergency funds. It’s a real financial issue, especially when a global health crisis hits the world.

In reality, there’s no definite reason why some households couldn’t build their emergency fund. Some lack the knowledge and the education of its importance. Others disregard the thought of the possible unprecedented financial challenges that will hit them, while many can’t start one as they live on a day-to-day basis.

Lessons From the Pandemic

The COVID-19 pandemic is just one of the many health crises that the world has faced. Many have challenged the world before, and there will be more in the future. But one thing is for sure- all these health crises that the world has faced proved one primary lesson: building an emergency fund is essential.

For 18 months, the economy and the growing industries halted. Businesses were shut down, operations stopped, consumers were scared, and everyone was trying to live every day.

It was tough, but what’s more though is that daily living expenses won’t stop. People need to eat, and the daily expenses keep ongoing. It became increasingly difficult for families who lost their source of income.

Fortunately, during the COVID-19 pandemic, families who had an intact emergency fund used it to pay for medical care, saving themselves the struggle and the distress of looking for additional finances for daily expenses. Doing this gave them enough time to wait for government financial aid.

But what about those who didn’t have one? That is when people are driven to seek loans that somehow can either break or make them.

How Big Your Emergency Fund Should Be?

Now, the most crucial question is how much money should be in your emergency funds? Is there a definite amount that a family should make?

As a rule of thumb, your emergency fund should be 3-6 months’ worth of expenses. That means your emergency fund should be equivalent to your six months’ salary.

Others even go beyond and make their emergency funds for over 12 months worth of expenses. That’s huge for some, but as many financial experts would like to have it, you can only build a huge emergency fund if you are relatively healthy, working at your optimum, and not paying any debt at all.

Also, they have emphasized that it’s not always about having a huge number, as the end goal is to practice the habit of saving. Saving without spending too much is the real key. Also, discipline yourself not to touch, disrupt or change your habit of putting money into your emergency fund.

Every household or individual has a different metric of how big their emergency fund should be. What’s important is that you develop the habit of saving money.

Final Words

Managing an emergency fund is one of the things that a person should learn when it comes to financial management. It plays a crucial role when you’re being financially challenged and when the world faces an unexpected health crisis.