An emergency fund is money you save in a separate account to help you out when unexpected expenses or a hiccup in your income occurs. No matter how much your plan, your crystal ball can’t predict everything.
And don’t take this a gloom-and-doom warning. Building an emergency fund helps keep you from unexpected debt if there’s a blip in your financial health. Being financially prepared will help reduce your stress in those emergency moments.
10 reasons you need an emergency fund
The reasons you need an emergency fund are related to unexpected expenses or a reduction in your income. Instead of taking out a loan or paying credit card interest, the money in your emergency fund can be used to pay the expenses.
And even if you’re not completely convinced, consider it also as a way to build passive income. If you keep your money in a high-yield savings account, each month you’ll receive interest on your cash.
Let’s look at 10 reasons you need an emergency fund.
Laid off from a job
Sometimes a company goes through difficult times and cut back on its staff. You may see the layoff coming or honestly it may come as a complete surprise.
While unemployment insurance can help, it probably won’t cover all of your bills. It also can take a few weeks to start paying. Having several months of regular expenses saved will help you keep paying your bills until you find a new job.
Unable to work for health reasons
What would happen if you find yourself unwell or had an accident, and you’re not able to work for a while? You may be eligible for disability insurance, but that may only cover your expenses for a limited amount of time. Or the insurance may take some time before it starts paying.
Or you need to take a step back from your job to care for someone else?
If you find yourself unable to work you may not only have your regular bills to pay but also additional medical bills coming in to pay as well.
Change jobs before finding a new one
Ideally you would find a new job before leaving your current position. Sometimes that’s not possible. While somewhat similar to a layoff, sometimes you need to leave a job before you can find a replacement.
Maybe the work environment has become a problem or the hours can’t flex to allow you to take care of a personal situation.
Or you need to resign so you can relocate out state to follow a spouse’s job or be closer to family.
Whatever the reason, you’ll be without your regular income until you find your next job.
Become self-employed or have a job with inconsistent income
Before you start down the path of trying out self-employment, or working in a job with inconsistent income, make sure you have some backup savings.
Or if you’re already in these types of positions, start building your emergency fund just in case a client doesn’t pay on time or you go through a dry season of billable work.
Medical or dental emergencies
Even with insurance, medical and dental bills are expensive. Aside from having to pay a deductible you may need to take unpaid time off from work.
You want to avoid unpaid medical expenses going to collections and onto your credit report as that will hurt your credit score.
Car repairs or car replacement
Cars are expensive. You can plan for regular maintenance, a large repair may not be something you can expect.
Sometimes the issue can be fixed or maybe it’s actually cheaper to buy a new car.
If a new car is in your future at some point, creating a car down payment sinking fund is a good goal to start so you don’t have to use your emergency fund when the time comes.
Unexpected home repairs
Just like cars, home repairs can be equally or more expensive. What happens when the water heater breaks or the heater stops working in the middle of the winter? Some repairs you can’t put off until you’re ready to pay for them.
We love our furry (or feathery) companions. And just like people our fur babies get sick or have another medical emergency. The vet bills stack up quickly.
Unplanned travel expenses.
Vacations don’t count as emergencies but sometimes you need to travel last minute because something has happened to a loved one. Traveling on short notice is usually more expensive than pre-planned. Not only do you have a new expense, you’re also likely paying more for travel than under normal circumstances.
Large, surprise bills such as taxes
Surprise! You just finished your tax returns for the year and you owe money. A lot of money. Usually the taxes taken out in your paycheck covers most of the taxes you owe. But if the tax rules changed during the year or something else change, you may need to pay a large tax bill in cash soon.
Any other large expense you haven’t thought of yet
The ideas above are to show you can’t plan for everything. For things you know will happen at some point create sinking funds so you can save a part of that each paycheck.
For everything else, having cash on hand to help you keep paying your bills or covering the unexpected expenses without the stress or extra debt. Give yourself the peace of mind knowing you can weather a storm if you need to.
Wrapping up. What other reasons do you have to build your emergency fund?
Save yourself the stress and have extra money saved to cover unexpected expenses or a hiccup in your paycheck. This is not about being gloom-and-doom that bad things will happen. Be prepared to keep on track with your bills so you can worry less.
What other reasons do you have to build your emergency fund?
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