The Role of Emergency Funds in Avoiding Future Debt
The Role of Emergency Funds in Avoiding Future Debt
Blog Article
Those colourful piggybanks from your childhood days in which you would collect coins until Christmas to buy you a present should not disappear as you come of age. The hobby of collecting coins serves a purpose that you do not realise unless you encounter a financial setback. Nasty things often catch us by surprise like you may lose your job or you may be stung for a rent hike. If your account is in the red, it will be hard to cope with these expenses.
Savings are vital to bail you out when you are caught off guard by the unexpected. It is normally suggested that you have at least three months’ worth of living expenses so as not to struggle during financial crisis, but it is hard for people who are on low wages. The average household in the UK earns £400, so you should keep one or two-week pay as the buffer.
It is vital to build an emergency cushion because it brings a lot of benefits. Here is why experts encourage saving as much as you can.
- It cushions the blow of unexpected expenses
Life throws curveballs and we are all well aware of this fact, so as a sensible person we are supposed to brace ourselves for them. Medical emergencies can pop up or your car can start acting up. Your boiler may conk out or worse you can be eased out of your job. Such kinds of unexpected scenarios can quickly put you off track. Not until you have an emergency cushion can you absorb the shock.
Apart from unforeseen expenses, you may need to rely on savings when you are a gig worker. The self-employed and the freelancer often struggle with cash flows. Sometimes, they find themselves at a loose end. Of course, you will still need money to get by. It becomes more important when you owe money. Financial instability cannot be used as an excuse to escape payments. With a considerable size of savings, you will be able to keep the wolf from the water when cash is not coming in.
- It helps weather financial storms
Economic downturns are also responsible for adding up financial problems. The pandemic was the best example to understand the impact of recession that led to mass job losses and reduced income. Many people were left high and dry because of a lack of savings, but those who had a substantial size of savings managed to save their skin. Having an emergency corpus to fall back on when something nasty like this happens helps keep your head above water. Although you can ban discretionary expenses, you still need some money to meet the basic necessities. A sinking fund serves as a regular source of money to meet your day-to-day expenses.
You should also brace yourself for personal crisis. A severe illness, divorce and natural disasters can significantly cause a bad impact on your finances, but the good thing is that you can soften the blow with the help of an emergency cushion.
- It helps keep you from falling into a deep debt hole
When haunted by financial emergencies, you turn to guarantor loans from direct lenders in the absence of savings. Loans have been designed to help tide you over when you are in a tight spot, but they are a good choice when you have to fund the gap. Although you have a considerable size of savings, it may fall short of cash to meet the unforeseen expenditure. Thankfully, there are some loans to help you fund that gap.
Many people rely on loans when they do not have savings at all, thanks to convenience they offer. Unfortunately, borrowing is exorbitant, and it can add to the risk of falling into an abyss of debt when you cannot cut it. Bear in mind there will be hell to pay.
While many of you can argue that a debt consolidation loan with bad credit in the UK can solve your problems, the fact is that they are hard to qualify for. On no account can you escape payments if you are struggling to hold up. Your lender may take you to court and forfeit personal property in some cases. Your credit score will also be damaged and all your chances of borrowing money at lower interest rates will go outside the window.
Savings help break the cycle of robbing Peter to pay Paul. Another benefit of reducing your debt dependence is that you can protect your credit rating. The higher the score, the more chances you will have to avail yourself of lower interest rates.
- It ensures peace of mind
You start to freak out when you lose your job and you do not have enough savings to fall back on. Having a nest egg helps relieve stress. You do not panic because you know you can easily get by. When you are stress-free, you are able to think more rationally and figure out a solution to reduce the impact of overwhelming financial pressure.
When you have an emergency corpus, you get a bit more time to find a perfect job for you. It allows you to negotiate for better salaries.
Ways to create an emergency cushion
Here are the tips to help you set aside money:
- You should start with a small amount. Make sure you set aside the set amount of money every month. Consistency is the key to large savings.
- Automate your savings. Link your pay account to your savings account and set up automatic transfer from your salary account to savings account.
- If you have to dip into your safety net, make sure you replenish it as quickly as possible.
The final word
It is intrinsic to have an emergency cushion even if you are living on low wages. It can help you avoid relying on debt and maintain a good credit score. You manage to stay stress free when financial emergencies crop up. Choose a fixed amount of money that you can stow away every month for a rainy day. Be consistent with your efforts. Report this page