Studies have shown that an alarming proportion of Americans do not have emergency savings that are necessary to cover something unanticipated like a minor medical bill or a car repair. Whatever the reason, many people simply do not have an emergency fund, let alone any amount of savings. While it may be tempting to spend whatever you make in a month, it is crucial to put money aside, even if it is not a lot, to cover the unexpected things that come up that put a dent in your finances. Here are some of the reasons why you need to have an emergency fund.
Many people go into debt precisely because they lack an emergency fund and need to borrow money when something bad hits. Once you go into debt, it is difficult to get out of it since debt is generally a spiral. Your emergency fund acts as a buffer that keeps you from having to scramble to borrow when you hit the proverbial bump in the road. The best way to get out of debt is to not get into it in the first place, and having a small cushion can help ensure that.
When you are a novice budgeter, sometimes you miss an expense here or there that you were not thinking of when you made your plan. It is hard to know with complete certainty everything that will cost you money over the course of a month. You may not have fully grown into your budget yet because learning how to allocate money is a skill that is gained over time. Your emergency fund can help you during this time because there is a good chance that you are likely to forget something. As time goes on, you will get better, but until then this fund is your friend.
If you are on your own with one income or if you have a partner who does not work, chances are that things may be tight. When there is no second income and you either lose a job or get sick, there is nothing else coming in to help you. Therefore, you need a decent sized emergency fund to help you in this time. Your goal should be to have close to a year’s income in your fund, but of course, you need to start somewhere and have some money put away. Whether you are single or have a family, it never hurts to have this fund.
When you do not have an employer, you do not always know when and if there will be money coming in every month. There are boom times and busts, and you need to have the money handy to get you through the lean times. You should build this fund up even more if you know that you are temporarily employed and your position may be ending soon. Also, bear in mind that if you work for yourself, you will likely have to come up with taxes periodically so you will need money put aside progressively because the IRS expects its due.
Anyone who has owned a home knows that things can go wrong at any second, and emergency home repairs generally cannot wait. For example, when your air conditioner breaks, you cannot delay in fixing it because your home can be unlivable in the summer. When you have a plumbing issue, it is critical to fix it right away. Not only that, but you need to have a couple of mortgage payments put away so you can continue to pay the bank even when your finances are not doing well. This also includes tax payments because the government can take your home for unpaid real estate taxes.
You never quite know when you are going to need an unexpected plane ticket when there is a family emergency that happens far away from you. Last minute airfare can get expensive, but you do not want a lack of funds to keep you from being able to go where you need to on a moment’s notice. You may also need to wire or send money to family when they run into a problem and you would have a hard time borrowing money to wire to them.
The stories that we hear of people going bankrupt because of medical bills are unfortunately all to real. You just never know when your insurance company will not pay a bill, leaving you on the hook. Your prescription costs may get raised, leaving you in a lurch when it comes to affording critical medicine. Not only is healthcare expensive, but not everyone has ample sick leave to cover the time off from work that they need to miss while they recover from their illness.
Your goal could be buying your own home or even affording your dream vacation, but either way, you will need money for it. You do not want to have all of your savings get taken from you when something bad hits. An emergency fund can protect your savings because you can simply dip into this fund when you encounter the unexpected.
While you may have difficulty coming up with an emergency fund tomorrow, it should be a priority and you can save up a little bit at a time. Keep this account separate from your regular savings account so you know what you can dip into and when.