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Why You Need An Emergency Fund

Last updated Oct 12, 2023

At your next financial self-check-in, take a moment to evaluate your emergency fund. Do you have one? If you do, does it have enough money in it? Is building it a priority? 

If you answered “no” to any of those questions, it may be time to reframe how you think about money and where you direct your income. An emergency fund is critical to your financial wellness and future stability for three key reasons.

An Emergency Fund Protects Your Budget

We’ve all been there: your paycheck just landed in your account. You’ve paid your bills and have a little bit left over. You’re feeling good about your financial situation…until your car breaks down and you’re hit with a pricey repair bill. 

Unexpected expenses (often called “financial shocks”) happen to everyone, but they’re much easier to handle when you have an emergency fund. A sufficiently large fund (i.e. $1,000 or more, depending on your ordinary expenses and whether or not you have debts to repay) allows you to pay for what you need in cash, rather than with costlier alternatives like a high-interest credit card or payday loan. Additionally, the mere act of building the fund can help you become more vigilant about budgeting and create awareness of your spending habits, which may come in handy during tumultuous economic times

An Emergency Fund Preserves Your Credit Score

While credit cards and/or personal loans can help you out in a pinch, they both can affect your credit score. For one, when you apply for credit your score temporarily drops by up to five points. Recouping those lost points is relatively easy, but if you submit too many applications at the same time, you may see a stark drop in your score. Additionally, applications for credit remain on your credit report for about two years, and if a lender notices too many of them spaced too closely together they may hesitate to approve you for further credit. 

Secondly, each swipe of your credit card can raise your credit utilization ratio, which is a measurement of the balance on your credit cards versus your total credit limit (both overall and for each individual card.) Your credit utilization ratio counts for about 30% of your overall credit score, so the higher your ratio grows, the lower your credit score may be. 

Avoid these credit-damaging pitfalls by having cash on hand to pay for emergencies!

Your Credit Score Matters

It’s important to keep an eye on your credit score in both good times and bad ones. Tools like Upgrade’s Credit Health monitoring is designed to boost your credit score and bring you greater financial health, making it easy to stay on top of your score and ahead of any potential trouble! Sign up to get real-time updates, personalized recommendations, and more.

An Emergency Fund Promotes Good Mental Health

A recent survey from Thriving Wallet revealed that a staggering 90% of Americans report feeling stressed about their finances, 65% feel like their difficulties with money are “insurmountable,” and less than 25% feel “extremely optimistic” when they think about their financial future.1 Financial stress can lead to or worsen a variety of mental health concerns, including confusion, guilt, shame, envy, and insecurity; and in extreme cases, can escalate into depression and/or an anxiety disorder.2

An emergency fund is one way to feel like you’re taking control of your money and using it more carefully and intentionally. Additionally, knowing you have a cushion to fall back on if something happens to your money and/or income may reduce your stress levels.3 In general, people with well-stocked emergency funds (or who are working towards having one) are calmer and less susceptible to adverse mental health effects compared to those with nothing saved for emergencies.4

Get Started Now

Ready to enjoy these potential benefits? Check out our guide to building an emergency fund

We’re Here For You

Building an emergency fund takes time, and emergencies don’t always happen at a convenient time. If you need more financial help than your current fund can provide, our credit lines and personal loans could help you get what you need quickly without breaking your budget.

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