When you start to invest, you have your financial eye on the distant future. Stocks, mutual funds, and retirement plans may take a while to mature, but they pay out impressive dividends once they do. This long-term approach can help you afford life’s biggest purchases and prepare for retirement.
Planning for these enormous goals is important, but your long-distance vision could be blinding you to expenses in the much nearer future.
If you only save for retirement, you may not be prepared for unexpected expenses that rear their ugly head tomorrow, in a few months, or next year. You have to balance everyday emergency savings with long-term goals.
Why Are Emergency Savings so Important?
Retirement might be 20, 30, or even 40 years away. An unexpected expense, on the other hand, could arrive tomorrow. You might need a tire realignment after driving over a deep pothole, or you may need a crown after you break your tooth on an especially hardalmond.
An emergency fund helps you afford unexpected expenses that aren’t normally a part of your budget. You can dip into these savings to cover auto repairs or dental bills without worrying about how you’ll pay rent.
An emergency fund grows from small, incremental contributions from cash that you won’t miss in a month. While each contribution may be small, their power is in their collective. Eventually, you may save the equivalent of three months of living expenses in this fund.
What Happens if You Don’t Have an Emergency Fund?
Without an emergency fund, unexpected expenses become that much harder to handle.
You might have the expendable cash available in your monthly budget to realign your tires, depending on the issue. But you have to recognize that some unexpected expenses come with thousand-dollar price tags.
Most Americans can’t afford more than $400 out-of-pocket without warning. They would have to borrow an online loan or line of credit to cover this much.
An online financial institution such as MoneyKey makes it easy to apply for short-term personal loans that provide backup cash to your savings. With short applications that can take just minutes to fill out, the folks at MoneyKey can respond quickly to your request for funds. If approved, you can get your funds quickly.
In other words, an online loan may work on an emergency’s urgent timeline. However, all online loans apply rates to the amount you borrowed. This means you’ll pay more for these loans than if you just had savings in the first place.
Can You Rely on Investments to Handle the Unknown?
Why save money in an emergency fund if you have some money socked away in investments? Most investments have early withdrawal rules and hold on how quickly you can access your funds. It may take days, weeks, or even months before you see that money, which is not helpful for urgent expenses.
Some investments might not even let you withdraw your funds until they reach their official maturity date. Those that do may apply penalties for withdrawing earlier than planned, and you can also expect to pay taxes on the amount you withdraw.
Bottom Line:
There’s no need to pull out of stocks or put a stop to your investment contributions. In fact, you should save for long-term goals. However, you should balance these long-term goals with short-term savings. Sit down with your budget to see how you can make these investments and save for a rainy day.
