Reasons Why You Need an Emergency Fund
No one knows when a financial disaster will strike! Unexpected bills, medical emergencies or auto repairs can happen at any time. Research shows that most Americans live paycheck to paycheck and in an hour of need, spare cash can be hard to come by. This is why setting aside some money in an emergency is not just necessary but vital if you want to overcome these financial hurdles. Financial advisors suggest that you have enough money in your emergency fund to meet your expenses for six months. This can guarantee a stress-free and debt-free life.
You Got Laid Off
Spurred by the economic turmoil and a lack of funds, job layoffs are now more common than ever. Whatever the reason for your layoff may be, you need an income buffer to meet your immediate expenses for the next few months. In fact, job loss is often seen as the most important reason for an emergency fund.
Ideally, your emergency fund should see you through at least six months. This ensures that you can still lead a comfortable life after you are laid off and don't need to worry about providing for your family or paying the bills. You can also take this time to find a job you like rather than accepting the first offer that comes your way.
Medical Expenses
When over-the-counter medication just won't do it anymore, you may need to visit the doctor or even the hospital. Depending on the severity of your illness, your health-insurance can only cover so much. Medical costs tend to pile up over time and you may need to pay for the expenses from your own pocket.
An emergency fund proves useful in these instances. The money can be used to supplement the coverage so you don’t need to borrow money to pay the bills. Your health should always be your first priority and having an emergency fund can help pay the bills so you can focus on getting better.
Home Maintenance
Buying your own home is a huge milestone in your life and nothing beats the feeling of elation and accomplishment it brings with it. However, homeownership also comes with a lot of responsibility, namely maintenance costs. Things like a hike in mortgage taxes or home repairs are often unexpected and something you need to be prepared for.
Having a backup fund can reduce the stress of having to deal with these expenses. As a homeowner, there are a lot of maintenance costs you may incur throughout the life of your home. You don't have to break the bank or go into debt to pay for these costs.
Your Car Won't Start
Another important expense that many people don't often account for is auto expenses. As your main mode of transportation, you rely on your car for everything from work to play. Hence, if you are unable to pay for repairs or replacement part costs, it can prove to be catastrophic.
An emergency fund is crucial during these times. Even if you have car insurance, you will still need to pay the deductible. Moreover, repairs to your brakes or tires can set you back a few hundred dollars if you don’t have a trusty emergency fund to reach into.
You Get Into An Accident
As terrible as an accident may be, no one can see it coming. While your insurance may see you through a portion of the expenses, you will still need to reach into your own pocket to cover the rest. Even the best disability policies only cover around two-thirds of your bill.
This is where an emergency fund can help. The money can help pay the medical bills and in the case of serious injuries, it can help you get through the recuperation period. You won't have to borrow money and go into debt to pay for the expenses.
A Tax Hike
The devil is in the details and more often than not an increase in your bills may be due to a tax hike. With a fluctuating economy, governments may be forced to increase or decrease taxes as part of their fiscal policy. In the event of a tax hike, an increase in your expenses is inevitable.
However, if you are financially savvy and have an emergency fund on reserve, it can help see you through this unexpected expense. It is hard to predict how high the tax hike may be so having a reasonable amount of cash on reserve is vital.
Unexpected Travel Costs
An ill family member or a death in the family forces you to buy a last-minute plane ticket which often comes with a large price tag. This could put a serious dent in your finances in the short-term. If you pay for the ticket with a credit card, not only would you find yourself in debt, you will also rack up the interest costs.
But having an emergency fund flush with cash can help you pay for this unexpected expense with ease and allow you to be with your family during the difficult period. Putting aside a small portion of your paycheck each month can result in a healthy financial reserve.
Pet Expenses
Owning a pet can be expensive. In addition to the food and grooming expenses, you also need to factor in the health costs as well. Just like us humans, our furry counterparts may also fall sick and will need to visit the doctor. It is estimated that pet costs can range anywhere between $3-$5K. If that's not an unexpected expense, we don’t know what is.
An emergency fund can ensure that all the members of our family, even the furry ones, are safe and healthy. You wouldn’t need to reach out of your own pocket to foot the medical bill.
Funeral Costs
The passing of a loved one can take an emotional toll and while dealing with this can be challenging in itself, the funeral costs can add up as well. If your family member or loved one has life insurance, it can cover the expenses but it can take many months before you actually receive the money.
Hence, having an emergency fund can help you finance those immediate costs. Planning for scenarios like a funeral is essential so that you are prepared when an unexpected expense strikes. It can also help you keep those large expenses off your credit card bill.
You Need A New Phone
In today's digital age, your phone is your gateway to connect with your loved ones and stay in the loop about what’s happening around the world. Therefore losing your phone can be incredibly inconvenient as you have no way of contacting someone in the case of an emergency.
In most scenarios, you are likely to replace your lost phone with a new one and this involves breaking the bank. The best way to avoid burning a hole in your pocket is to have an emergency fund with a substantial amount of cash. This way you can pay for your phone with little to no impact on your current expenditure.
Avoid Credit Card Debt
During an emergency, most people are likely to take out a line of credit to meet their immediate expenses. While this can help keep you afloat in the short-run, it can result in greater debt in the future in the form of interest rates.
When creating a financial plan, it is important to think long-term. A line of credit can only see you through the short-term costs but having an emergency reserve can ensure that you meet all your expenses while remaining debt-free. Moreover, if a financial disaster were to occur in the future, the money in your fund can help you steer clear of debt.
Pregnancy
Babies are really cute but they can also be very expensive. In some cases, the pregnancy may not always be planned and this can result in a sudden influx of expenses that you need to pay for. Alternatively, you will need to restructure your finances and evaluate your current spending habits to factor in the costs associated with a new baby.
However, maintaining an emergency fund can help see you through the expenses for at least the first couple of months. This gives you enough time to re-think your income and spending levels as you prepare for the arrival of your baby.
Invest Your Money
The best way to increase your income levels is to invest your money. While you may keep aside a portion of your paycheck for the purpose of investing, you may come across an opportunity that requires a greater capital investment. In some cases, it could involve breaking the bank to fund those investments.
However, with an emergency fund, you could finance these expensive investments with ease. You can reach into this reserve to pay for the investment. Not only does this let you capitalize on a good opportunity but you get to watch your money grow.
A Pay Cut
When there is a downturn in the economy. you may be laid off and forced to seek new employment. However, your new job may require you to take a pay cut, putting a dent in your finances. You will need to re-think your current lifestyle and find ways to cut back on your expenses.
However, while you figure things out, an emergency fund can help see you through the tough times. You can reach into this excess cash reserve and will not need to take out a loan or a new line of credit to finance your expenses.
Don't Touch Your 401K
Your 401K is a retirement account that you contribute a portion of your paycheck into every month. While this essentially serves as a savings account for the long-term, you may be tempted to take money out of your 401K during your hour of need.
However, this is not a viable solution for two reasons. One, when you take money out of your 401K account, you need to pay taxes on the amount and these rates are often much higher than the norm. Second, using up the money now leaves less for your post-retirement life, when you actually need the money. Hence, having an emergency fund can avoid breaking your 401K and keep your retirement savings intact.
A Break Between Jobs
Whether you resigned from your job or were laid off, the period of unemployment is usually a tough one. When you don't see that monthly paycheck deposited into your account, it reduces your sense of security.
An emergency fund can’t replace your paycheck but it provides a healthy financial cushion until you figure out your next move. Moreover, it’s always a good idea to take some time off between jobs so that you can polish your skills and focus on finding a job you like. However, you can only afford the luxury of taking a hiatus when your cash reserve can pay for your expenses.
Need To Move To An Expensive Locale
The good news is that you found a new job but the only issue lies in moving to a more expensive neighborhood to be closer to your job. This doesn't just apply to employment in the same city, some jobs may require you to move to a different state altogether. Different states have a varied cost of living and tax rates. Hence, if your new job is in an expensive city, it could affect your finances- at least in the short-term.
Finding a new house and transporting all your goods can get expensive. Moreover, if your current budget doesn’t account for these expenses, you could find yourself in a serious cash flow crisis. A safety cash reserve can help pay for these costs until you can re-structure your finances to suit your new lifestyle.
Natural Disaster
No one can fully predict when the next natural disaster will hit so if your city or town is the victim of a flood, hurricane or tsunami it can put your finances in serious jeopardy. Depending on the severity of damages to your home, car, or other things, you will need some money to replace what's lost.
While an insurance policy can help cover some costs, you will still need to pay a certain amount from your personal funds. This is where an emergency fund comes in handy. You can finance for these unforeseen expenses without putting a major strain on your income.
Achieve Your Financial Goals
Setting high financial goals can help you master the FIRE (financial independence, retire early) moment. One of the most important aspects of achieving this financial freedom is to put aside a portion of your paycheck into a savings account AKA an emergency fund.
Having a financial buffer is incredibly gratifying and gives you a sense of security. According to numerous financial advisors, maintaining an emergency fund is also one of the most important financial goals. You will no longer need to take on more debt to meet any unforeseen expenses.
Lower Stress
In addition to meeting your financial goals, an emergency fund also lowers stress significantly. Many problems often stem from not having enough money to meet all your expenses so an emergency fund gives you peace of mind. Knowing that you can meet any unexpected expenses as they come is an empowering feeling.
Moreover, you can get flexible with your spending and adjust the balance in your reserve account as you see fit. Having that emergency fund in your corner can guarantee a stress-free and debt-free life. As they say 'prevention is always better than cure.'
