In life, you can always expect the unexpected. You may not know which curveballs will be thrown your way, but you can be financially prepared to deal with the issue by building an emergency fund.
This isn’t your regular savings account. It’s money set aside to take care of unplanned expenses or events that impact your financial security.
Continue reading as we take a look at why you need to have emergency expenses ready for those unexpected bills.
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Why should creating an emergency fund be a priority?
There are times when life hits you with an unexpected bill, and not having emergency cash on hand could add more stress to the situation. Car repairs, medical expenses, or plumbing issues can all sneak up on you out of nowhere.
Losing a job or taking a pay cut can cause disruptions to your financial planning, leaving you scrambling to pay bills. But if you have an emergency fund then you have a safety net to catch you when life throws you off balance. Keeping emergency money readily available means you won’t have to wait for approval on a high-interest loan or pay interest fees on your credit card.
When the unpredictable happens, your cash flow won’t be derailed. Keep in mind, this isn’t a long-term savings plan but a fund to cover unforeseen situations that should only be used in the case of an emergency.
When to use an emergency fund
A guideline to stick to is to only use your emergency cash when the unexpected happens. Whatever you are spending the funds on should be a necessary and urgent expense. Set a specific dollar amount for the account and only draw from it when an emergency occurs. Be sure to replenish the amount withdrawn so you are prepared for the next unexpected bill.
Unexpected expenses
An unanticipated medical expense can happen even when you have insurance. Depending on the situation, if emergency surgery is needed you may have a larger copay than usual. Or you may need to reach the plan’s deductible to mitigate expenses.
Car and home repairs can also surprise you. A pipe may burst causing an unplanned visit from the local plumber who determines the problem may be more extensive than you think.
Or that funny sound your car has been making may finally stop — and not for a good reason. Maybe it’s the radiator — or worse, the transmission. If you use your car to commute to work daily then you’ll need to get it up and working as soon as possible.
There’s also the unexpected death that may require you to travel out of state. Having emergency cash ready will help in each of these situations. You have enough to worry about, so why not make it easier on yourself by starting an emergency fund?
Medical expenses
Medical expenses are often the cause of financial distress and can happen to any member of your household. If you have pets, keeping them healthy is certainly a priority. They may experience an illness that requires immediate medical attention and you want them to receive the best care.
One of your children may have an accidental fall and break a bone, or you can be involved in a fender-bender and need to be taken to the emergency room. Dental surgery may be needed and if you aren’t prepared, you will have to find other means to pay your bill.
An emergency fund will ensure your household is protected so if you or someone you love experiences an unexpected medical emergency your bank account won’t be depleted.
Job loss or pay cut
Losing your job is another financial emergency that you have to be prepared to tackle. You may be a freelancer who recently lost a client and your income has been reduced. Keeping enough cash to carry you through for three to six months could keep your stress levels down.
That emergency money will cover living costs and give you time to find another job or lower your expenses. You won’t have to worry about food or housing as you’ll be able to sustain your lifestyle as you seek ways to supplement your income.
Car repairs
Car repairs can quickly become a financial burden, especially if the repairs are major or require replacing expensive parts. In such situations, having an emergency fund can help cover the costs without putting a strain on your budget or resorting to high-interest loans or credit cards. An emergency fund could also minimize the stress and disruption that occurs when your car unexpectedly breaks down, as it allows you to handle the situation promptly without affecting your daily activities.
Home repairs
Home repairs are an inevitable part of homeownership, and sometimes they can catch us off guard. From a leaky roof to burst pipes or a malfunctioning furnace, these unexpected repairs can quickly escalate into major issues if not addressed promptly.
Having an emergency fund specifically designated for home repairs can prove to be a lifesaver in these situations. This will help you deal with unexpected repairs efficiently and provide you with peace of mind knowing that you’re prepared for any unforeseen circumstances that may arise.
With an emergency fund at your disposal, you won’t have to resort to loans or credit cards, which can result in additional financial burdens because of interest payments.
When not to use an emergency fund
Now that we know what situations emergency cash should be used for, let’s look at the reasons you should not tap into these resources.
Periodic and expected expenses
There are bills that you know are coming every month, quarter or year. Either way, these should be included in your regular budget, and if they’re not, now is the time to start.
Insurance payments, subscription renewals, taxes, car registrations, and similarly scheduled bills should all be planned in advance. These are not expenses that catch you off guard, you know they are coming and your emergency fund is not made to cover expected expenses.
Nonessential spending
Christmas comes around every year and if you want to buy gifts, your emergency cash should not fund your shopping spree. You may be due for a new mobile phone, and if so, your upgrade should be paid for with the money you’ve budgeted for personal expenses.
For many, creating an emergency fund may require a closer look at what you prioritize and you may need to make some changes. If so, it’s better to do it now and save yourself a lot of grief later.
Vacations
Although your desire to take a vacation may feel like an urgent need, this is not an emergency. A vacation fund is much different than an emergency fund, and if you love to travel, you should begin setting aside money for that specific purpose.
This will keep you from using credit cards unnecessarily. There’s nothing like coming back from vacation and not having to worry about paying for it over the next few months. Keep emergency cash and vacation-related savings separate. That way, you can lounge on a beach while still having a secure safety net.
After all, you can experience an emergency situation while on vacation and if you’ve used your emergency fund to pay for plane tickets and hotels, what will you dip into?
Always rebuild your fund
If you have a true emergency and need to dip into the emergency cash stash, make sure you replenish what was withdrawn. Keep your spending to a minimum until you reach the preset amount for your fund. If you had to use it, that’s OK because that’s why you have it.
You may have used more than expected and you might want to increase the amount you save in the emergency fund for the next time you need it. These funds should be your priority, so if you’re saving for an upcoming vacation or a new car, you will have to put that on hold until you rebuild the emergency fund.
Finding a side gig can hasten the pace at which you save, and it can even help contribute to the other funds. Whatever you do, always replace your emergency money once you’ve used it by adding more to your savings fund.
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Stay dry on rainy days
Saving for a rainy day is necessary because it’s going to eventually rain. When it does you want to have an umbrella big enough to keep you from getting soaked. An emergency fund is one of those things that’s better to have and not need than need it and not have it.
FAQ
What is an emergency fund?
It’s a savings account separate from your regular savings that exists to only get you through an emergency situation.
How much should I have in my emergency fund?
It really depends on your lifestyle, but a general rule of thumb is to keep enough to cover three to six months of expenses.
Where should I keep my emergency fund?
High-yield savings accounts, money market accounts, certificates of deposit (CDs) and individual retirement accounts (IRAs) are great places to stash your emergency cash.
