As the parents of young children, you know how the unexpected can suddenly occur. If you don't have an emergency fund, you may be left scrambling to find the funds to take care of an unforeseen event. This can lead to untold stress, pressure and even needing to take out a high-interest loan.
Therefore, setting up an emergency fund is crucial for young parents. In addition to covering emergency situations that can happen with toddlers and children, an emergency fund can also:
•Help you avoid debt
•Provide backup should you lose your job or get sick
•Alleviate stress — you know you have a safety net
•Help you avoid withdrawing from your retirement fund and incurring penalties
How much should you keep in an emergency fund?Financial experts recommend having between three to six month's salary stored in an emergency fund. Of course, that is easier said than done. With all the monthly bills and the general cost of raising children, many families find that they don't have that much to set aside.
This is where priorities come in.
There are certain things that young parents want to do, like start a college fund for their child, save money for retirement and get life insurance. Are these more important than an emergency fund? Below we examine how you should prioritize.
Is a college fund more important than an emergency fund?A college fund is NOT more important than an emergency fund — you have years until your child goes to college (and that's not always a given), but an emergency can happen at any moment. Cover yourself in case of an emergency, then save for college.
Is a retirement fund more important than an emergency fund?According to personal finance reporter Tanza Loudenback, creating an emergency fund is more important than aggressively saving for retirement. While you shouldn't neglect your retirement funds completely, it's more important to achieve a viable emergency fund over the course of a couple of years than to put that money toward retirement. If you don't need it in the end, it can go toward retirement. If you do need it, you'll be able to use it without taking a loan or withdrawing funds early from a retirement plan, which comes with penalties.
Is life insurance more important than an emergency fund?Life insurance is more important than an emergency fund because if something happens to you as a young parent, your family will be left with virtually nothing if you don't have a life insurance policy. Three to six month's salary will only last for those amounts of time, but a life insurance payout can last much longer. While you hope you'll never have to cash in on it, life insurance is essential for young parents.
As a young parent, the first step towards financial responsibility is to get life insurance. Once you have that taken care of, you can start setting aside cash to have as your emergency fund. Hopefully, you'll never need to use either of them, but if disaster strikes, you will be thankful that you have them.