Why Do You Need an Emergency Fund?
- Job loss or unemployment
- Medical or dental bills
- Home repairs
No one wants to spend their time contemplating worst-case scenarios. But if an emergency happens and you’re not financially prepared, the fallout is not just super stressful, but can have serious financial consequences. It’s the most important reason you need an emergency fund.
Christine Luken, author and personal finance blogger, found this out the hard way.
“Before I had an emergency fund, if I had an unexpected car repair or a vet bill, I had two problems,” she says, “The original emergency and a money problem.”
Once when Luken’s alternator failed, she had to resort to payday loans to pay to fix it, and that lead to credit problems.
“That started a cycle of payday loans that spiraled out of control,” she says. “I ended up bouncing a check to the payday lender.”
Setting up an emergency fund was transformative for Luken, who recommends saving at least six months worth of your salary for unexpected costs (a failed alternator can happen to anyone).
“My emergency fund is like a shock absorber between me and life,” she says. “I still have vet bills and car repairs, but they are less stressful and disruptive because I have the money in savings to cover the cost.”
There are a lot of reasons why you need an emergency fund—here are four of the most common:
Protecting your career is one reason you need an emergency fund. “People lose their job unexpectedly and have had to figure it out,” says David Wright, a blogger at DollarBits.com, a personal finance website. “If they had an emergency fund, they could have cash available to pay their rent, utilities, etc. Without that fund, how would you be able to make ends meet?”
In the event of a job loss, one of the key reasons you need an emergency fund is so you can make a thoughtful choice about what your next career move will be.
“If you have an emergency fund, you can focus on finding the next job that’s right for you,” Luken says. “If you’re financially desperate, you may feel pressured to take the first position that you’re offered, even if it’s not the best fit.”
You’re young, you’re healthy—what can go wrong? A lot, actually. From unexpected illnesses or cavities, to major accidents, one of the many reasons for an emergency fund is so you don’t find yourself with big medical expenses and no way to pay for them.
Even if you have medical or dental insurance, that doesn’t guarantee you won’t have to pay for all or part of your care out-of-pocket. In addition to deductibles, some procedures might not be covered, or you may max out your coverage for non-essential healthcare in your plan year.
Emergency medical expenses are usually covered by health insurance plans, but an important reason for an emergency fund is to prepare for deductibles and procedures that may not be covered by insurance, like dental implants in the event that you lose a tooth. “These costs can run into the thousands of dollars,” Wright says.
If you’re looking for reasons why you need an emergency fund, imagine scrambling to come up with the funds to cover a medical emergency, rather than taking care of yourself.
“When you’re not worried about the cost of your medical care,” Luken says, “you can concentrate on getting better.”
“My emergency fund is like a shock absorber between me and life.”
You’re sitting down on the couch to watch a movie with a big bowl of popcorn and suddenly your toilet begins overflowing. Perfect. Not only would that ruin your evening plans, but it could break your budget since plumbing emergencies aren’t cheap. Yet another good reason why you need an emergency fund.
“While most people have homeowners insurance, there are expenses that aren’t covered by insurance,” Wright says. “Even if the expenses are covered, the insurance provider may be slow to pay.”
A good reason for an emergency fund? The ability to pay for unforeseen but necessary home repairs—like if you need to repair or replace an appliance—without having to charge large sums to your credit card.
“If you did have unexpected expenses and paid for them with your credit card,” Wright says, “your emergency fund will help you pay off that card without incurring any interest expenses.”
Add car repairs to the list of reasons why you need an emergency fund. Having a working car is critical for many people, especially for those without access to public transportation. If you don’t have a car, you might have difficulty making it into the office on time or have to default to a taxi or an Uber—which could quickly become expensive.
One common reason for an emergency fund is to cover the cost of an expensive car repair or accident. Even if your car is insured, you may still have to pay the deductible in the event of an accident, and common car repairs like new brakes, new spark plugs or a new timing belt could set you back hundreds of dollars.
“If you don’t have an emergency fund, you might be forced to choose a repair provider who will approve you for payments, rather than the one who has the best overall price and quality,” Wright says. “This alone could save you 15 to 20 percent if you had the cash to pay for repairs upfront.”
While you can’t ever fully prepare for emergencies, the reasons for an emergency fund are many: your pipes may freeze, you could receive an unexpected tax bill, you may need to travel last minute to visit an ill relative, or… the list goes on and on. Planning now is the best way to ensure you can handle unforeseen challenges.
Luken, who took about a year to save her emergency fund, loves the peace of mind her savings offer.
“I never want to go without one again,” she says. “It helps me sleep better at night knowing I can handle life’s financial ups and downs.”
She suggests automating the process of saving for your emergency fund—something you can do by opening an account like Discover’s Online Savings Account and setting up an automatic transfer.
“Set up automatic transfers from your checking account or paycheck into a savings account so you don’t have to think about it,” she says. “Even $50 or $100 per pay period accumulates fast.”
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