Meeting the monthly budget can be difficult enough without trying to put something toward savings. But everyone should have an emergency fund to avoid relying on credit or having to do without something you truly want or need. Here are five reasons why you should start an emergency fund now.
Loss of Income
If you lost your job, how would you pay the bills until you found another position? An emergency fund should ideally include enough savings to pay the bills for three to six months. Some experts recommend maintaining financial coverage for a year. Even if your hours got slashed while you could still keep your job, you might not have enough income to pay all monthly expenses. Stash enough away to cover expenses for 3-6 months.
Unexpected Financial Need
An unplanned need might arise that cannot be paid for from the regular budget or income. If your car is totaled in an accident, but the insurer appraises its value for less than you owe, unless you have gap insurance you will have to pay the balance of the destroyed vehicle plus the cost of a replacement. The same applies to home damage from bad weather or aging, when the replacement cost may be more than the insurer is willing to pay. An emergency savings account could cover the difference.
Death in the Family
The reaper has an unfortunate propensity to surprise us. Parting.com estimates the average funeral cost as between $7,000 and $10,000. Ideally every family should have about ten times their annual income in level term insurance on their income-producing members, and a small rider on anyone else to cover funeral expenses. But not everybody makes wise decisions with their insurance, and even if they do, you may be required to travel to the funeral on short notice.
Hopefully nothing devastating will happen, but if it does, an emergency fund helps to meet associated expenses. For example, if you are in a car accident that keeps you in rehabilitation longer than your disability pay will cover, emergency savings can cover remaining expenses. When it’s all said and done, a non-fatal car accident will cost over $60,000, according to Dave Abels. If a tornado blows a tree onto your roof, you will need temporary shelter that can be paid up front from emergency funds, until the insurance reimbursement kicks in.
The best-laid plans often go unexpectedly astray. College costs may soar higher than planned. Funeral expenses might supersede the prepaid plan. An emergency fund cushion helps to cover surprise costs that cannot be anticipated.
Not having an emergency fund is risky. Save something each month, possibly ten percent of income, for unplanned expenses. You won’t regret it!