Why You Need Emergency Money
You have probably experienced an unexpected financial emergency at some point in your life – a broken fridge, a damaged laptop, a fender bender, or even a loss of income.
Small or large, these unexpected expenses always seem to have the worst timing.
If (really when) disaster hits and you don’t have emergency money, it could devastate your day-to-day cash flow. You may be forced to tap your retirement account, take out a loan or rely on credit cards. This could leave you drowning in debt, and breaking out of a debt cycle can be painfully difficult.
As with most things in life, weathering the financial storms we are all sure to face requires preplanning.
Unfortunately, finding a way to preplan seems to be a task many Americans have had difficulty accomplishing.
According to Bankrate.com’s July 2021 Emergency Savings Survey, more than 51 percent of American adults have less than 3 months’ worth of living expenses covered in an emergency fund.
An Emergency Fund Makes a Difficult Future Situation a Little Bearable
An emergency (or rainy day) fund acts as your financial safety net.
Stashing away anywhere from 3-6 months’ worth of your monthly expenses in a liquid and accessible bank account is a great way to protect yourself as you figure out a more sustainable solution for your situation.
When life throws an unwelcome financial surprise your way, you’ll be able to recover faster and get back on track towards attaining your larger savings goals.
Here are 6 scenarios where having emergency money could benefit you:
1. Job Loss
Job loss is the main reason you need an emergency fund.
Just think about it, what will happen if you’re suddenly fired from your job? Will you be able to make ends meet as you calculate your next move? Or will a job loss create a serious financial strain for you?
The coronavirus pandemic has now lasted for 18 months. In May 2019, unemployment rates reached record highs in May 2020. The government rolled out stimulus packages, but that took time and not everyone qualified for it. Many Americans had to live on their savings.
According to a Forbes survey conducted by YouGov, the pandemic triggered nearly 40 percent of people who had emergency funds prior to March 2020 to access them, with 73.3 percent spending up to half or more of the funds.
Just like these people, an emergency fund will help you to pay for rent, utilities, healthcare, transport, food, and other day-to-day expenses.
You should especially consider setting up an emergency fund account if you’re in a high-risk industry where layoffs are common. If you lose your job, a rainy day fund can help you make a thoughtful decision about your next move.
You see, when you’re financially desperate, you may succumb to the pressure of taking the first position you’re offered, even if it isn’t the best fit.
2. Sudden Medical and Dental Problems
You’re young and healthy; what could go wrong? A lot, actually.
No job or lifestyle is exempt from the risk of illness and injury. If you don’t have health insurance, a trip to the emergency room could set you back a few thousand dollars.
And even if you have health insurance coverage, insurance companies may not cover certain procedures. Some situations like emergency surgery may require you to shell out some cash to cover your policy’s deductible and co-payments.
Also, it’s possible to max out your coverage in your plan year if you have a serious medical condition.
A well-funded emergency fund can sort out these costs and make it easier for you to get through these challenging times.
3. Unforeseen Home Repairs
Being a homeowner means you’ll have to pay for all required repairs on home appliances and systems.
You may have homeowners insurance to cover unexpected home expenses, but what if you have a high deductible? Could you raise enough cash to cover it?
Also, standard homeowners insurance only covers certain scenarios, like items damaged by water, fire, wind, and other such events.
Having a sinking fund makes owning your home just a bit less stressful. If you’re hit with a plumbing or air conditioning repair bill, you can handle these costs. Don’t let a simple repair make you eat Ramen instant noodles until your next payday.
4. Car troubles
Having a running car is essential to most people, especially if you live in an area without public transportation.
You probably relate to that mini heart attack you get when your mechanic is about to explain why your engine light is on.
Common auto repairs like a new timing belt, spark plugs, or brake pads could set you back a couple hundred dollars.
If you run into an accident, you may be required to pay the deductible from your pocket. Turning to Uber or Lyft can quickly become expensive.
An emergency fund account will help take some of the financial sting out of dealing with such expenses.
5. Unanticipated Travel
Life happens, and when you least expect it, you can lose a loved one and be required to purchase a last-minute plane ticket. These tickets don’t come cheap.
Without emergency money, you may be tempted to charge large sums to your credit card. If you live far away from your family, consider setting up an emergency fund to cover the cost of last-minute bookings.
6. Saving for a Goal
If you’re already saving for a goal like to pay off college loans (will they ever go away?) or buy a property, congratulations!
An emergency can help you resist the temptation of dipping into those savings every time an unexpected expense pops up.
Conclusion
While emergencies can’t always be avoided, an emergency fund will empower you and allow you to make good decisions in times of a financial crisis.
Remember, an emergency fund isn’t a piggy bank. It would help if you did not tap from it whenever you want to take a vacation or buy the latest iPhone.
When you set up one, view it as an insurance policy – use the fund only in the event of an actual emergency.
When you do have to draw money from this fund, it’s vital that you start rebuilding it immediately!
