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Can Bitcoin Serve as Your Emergency Fund?

Setting up a dedicated savings or emergency fund should be the primary financial goal at the beginning of 2023, as you can avoid high-interest debt and adhere to long-term goals, such as retirement savings. Not having an emergency fund is one of the worst financial mistakes you can make because you’ll struggle to get funding from any source. Just think about it. You barely have the money to pay for expenses like housing or groceries, so you would experience great difficulty in coming up with the necessary cash to cover for unforeseen expenses. Inflation isn’t transitory, unfortunately, so higher prices will most likely last through 2023, if not longer. 

Over the past couple of years, cryptocurrency has gone from an overlooked asset to a conventional investment due to the fact that it doesn’t involve strict involvement from central institutions, such as governments or banks. If you own Bitcoin, you might be curious to know if you can count on it as your emergency fund. Generally speaking, your emergency fund should consist mainly of cash for life’s unexpected events, but you can aim for digital assets like Bitcoin that you can quickly transform into cash. Gauging liquidity involves factors like BTC price, trading volume, and the token’s overall market capitalization. 

Why Create an Emergency Fund, Anyway? 

An emergency fund is basically a personal budget, representing three to six months of your monthly income, that you set aside for future mishaps, of which mention can be made of job loss, medical emergencies, car troubles, and unexpected home repairs. The cash is supposed to eliminate the risk of becoming dependent on credit, falling into debt, or running out of money when you need it the most. While there’s nothing wrong with having an optimistic outlook, you can’t ignore Murphy’s popular adage, which says that “anything that can go wrong will go wrong”. Accepting this law as a universal rule is the first step towards neutralizing it. 

Ultimately, the size of your emergency fund depends on your lifestyle, monthly expenses, income, and dependents. Building an emergency fund offers the following benefits: 

  • You reduce stress by being financially fit. Losing your job or falling ill puts your mind and body through stress. You avoid contact with creditors, cancel social plans, and feel embarrassed/ashamed, all because you’ve lost control of your finances. If you have a safety net, you can get by without running into a crisis. 
  • It keeps you from spending on a whim. Spending money on random stuff is always a temptation. You’re tempted to use your credit card for a big-screen TV or a gym membership you don’t plan on using. Having an emergency fund encourages saving behavior, meaning it motivates you to reduce impulsive spending. 
  • You can avoid bad debt. Credit cards and other similar products do little to enhance your financial outcome, so they’re called “bad debt”. An accumulation of bad debt can have detrimental effects on your financial health, like making it harder to save for retirement. If you’ve got an emergency fund, you don’t even think about using bad debt. 

Don’t Dismiss the Idea of Investing Your Emergency Fund 

It’s impossible to predict the next emergency, but you can prepare for it. If you keep your money in a traditional bank account, there’s the risk of withdrawing the money when it’s not genuinely an urgent situation, so you should take into account the possibility of investing your emergency fund. You can use digital assets like Bitcoin for your emergency fund, there’s nothing wrong with that, but the funds should be for purposes other than unanticipated expenses because their value can fluctuate. Put simply, invest your money in a way that offers decent returns without compromising on quality. The more you have in the emergency fund, the better you’ll be protected if you experience financial hardship. 

Investing limits immediate access to the money in your emergency fund, so it’s definitely not for everyone. Therefore, you can keep your emergency fund in a savings account at the bank, in spite of the fact that inflation will slowly but surely eat away at your purchasing power in the future. In case you didn’t already know, the money in savings accounts hasn’t grown in the past years due to historically low-interest rates. In clear, straightforward language, your money’s purchasing power declines while you’re saving it. Investing gets your money to work harder, so you can expect better returns and expect greater financial security. 

Some Important Rules for Having a Crypto Emergency Fund 

Until now, it’s clear that it’s crucial to have some extra funds available for emergencies to ensure your overall financial well-being; large or small, unplanned expenses can hit at the worst times. If you’re ready to save, here are some important rules to follow: 

  1. Pick A Crypto Wallet That Lets You Be Your Own Bank

Once you’ve purchased Bitcoin, you can use a custodial or a non-custodial wallet to store your funds, although the latter is preferable. You’re the only one in control of the keys, which translates into the fact that you can use your tokens as you wish, so practice good password management and online security behavior. It’s up to you to protect your holdings. A non-custodial wallet can be software installed on a desktop or mobile device, but it can also take the shape of a hardware device. 

  1. Remember Why You Have an Emergency Fund

It’s easy to convince yourself that a want is a need, so refrain from tapping into that pool of hard-earned money because those savings are there to serve a purpose. Don’t lose track or focus on your goals. If you want to save for a family vacation, for example, it’s recommended to have a separate stash of money set aside so that you’re not tempted to use your financial safety net. Tapping into your emergency fund will only jeopardize your ability to meet your financial goals. 

As has been demonstrated, it’s not such a bad idea to take cash out of your safe and put it into Bitcoin, whose liquidity makes it a good investment. Your emergency fund can be stored in a crypto wallet that’s readily available regardless of the situation. 

Featured Image: Pexels

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