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You need an emergency fund.
You have probably heard that before.
On the life importancy scale, which I just made up, having an emergency fund ranks up there with washing your hands, wearing sunscreen, and being sure to floss.
All things you should be doing, but some people aren't. Ewwww… can you say gross!
According to a 2017 GoBankingRates survey, 57% of Americans have less than $1,000 in savings.
Already ready to get started and open an emergency fund? Find the right online savings account for you:
More than half of Americans lack an adequate emergency fund! Without savings, unexpected spending forces people to take on debt or dip into their retirement funds prematurely.
Debt for emergencies is usually credit card debt and with interest rates at 16% or more, credit cards are a very expensive way to handle sudden expenses.
Dipping into retirement funds prior to age 59.5 results in taxes, penalties, and a depleted retirement account. Just ask me, that's one of my worst money mistakes.
Think it's not going to happen to you? Here is a list of common events and reasons you need an emergency fund.
1) Job Loss
It really stinks to lose your job. I know, I've been there.
Even if you don't have a job, you still need to spend money on food, housing, and toilet paper. Expenses don't stop.
A popular rule of thumb is to have enough savings to cover three to six months worth of expenses. That's a good start, but it's just a rule of thumb.
In rough job markets, like 2011, the average duration of unemployment was 40 weeks or about 10 months. So you might want to build that emergency fund a little higher.
My kids bring home germs like sand from the beach. No matter how hard I try it's coming into the house. One person gets sick and then the illness takes turns through the family until we've all shared in the misery.
Everybody gets sick. Unfortunately, the average worker only gets 8 paid sick days a year. After a little more than a week, you'll be eating into vacation time, or completely unpaid.
You might say, “I'll just tough it out and go to work sick”. Don't do it. All of your co-workers will hate you.
Make sure that you have an emergency fund so that you can keep your germs at home and maintain your workplace friendships.
Thanks to seat belts and airbags the percentage of people who die in car accidents has decreased dramatically. Unfortunately, just because you don't die, doesn't mean you won't be hurt.
According to the Social Security Administration over 1 in 4 of today's 20-year-olds will become disabled before they retire.
Social Security Disability provides a small benefit, but it defines disability very strictly.
Short-term and long-term disability policies might also help, but even the best ones only cover two-thirds of your total income (including social security income).
Having an emergency fund will help you make up the difference in income until you can get back on your feet.
4) Dental Work
No one expects to have a root canal.
Dental emergencies can be very sudden and extremely painful. Living with tooth pain usually isn't an option.
Dental work is also very expensive. Even if you have dental insurance it may not cover all the costs.
Whether you have cavities, something more serious, or your children need braces, dental work is a high unplanned cost. Having an emergency fund makes the dentist visit slightly less painful.
5) Tax Bill
Have you ever waited until April 14th to do your taxes?
If you get bad news and you owe a massive sum, you'll cry even harder when you realize that the money is due the next day! Ouch.
Tax bills are always unwelcome and unexpected expenses. By having an emergency fund you can soften the blow. As a bonus, if you complete your taxes earlier, you will be better prepared for your results.
6) Car Trouble
Clunk, clunk, clunk…
That's the sound of money draining from your car. Whether the car won't start, has a flat tire, or the hood is smoking like a chimney, car trouble is never expected and usually costly.
Whether the car won't start, has a flat tire, or the hood is smoking like a chimney, car trouble is never expected and usually costly.
Have you ever had the cost of the repair be more than the value of the car? An emergency fund will reduce car repair stress, or let you buy a new car. Just don't buy a brand new car with it.
7) Home Repairs
Similar to cars, roofs and hot water heaters weren't built to last forever either.
At one point my wife and I joked that we were living in the Money Pit (the 1986 movie starring Tom Hanks and Shelley Long). Every month something would go wrong in the house, and it always seemed to cost $1,000. Home repairs were brutal to our emergency fund, but without it, we would have had to take on a decent amount of debt.
Home repairs were brutal to our emergency fund, but without it, we would have had to take on a decent amount of debt.
8) Unexpected Travel
Visting a sick relative or a death in the family could have you booking last minute travel.
A few years back my grandfather was in the hospital and I got the call that I had better come to see him. I hopped on a plane to the east coast and was able to spend a few days with him. The day after I got back home he passed away.
I am so thankful for that trip. If I didn't have reserve savings I might have delayed my trip and missed my chance to say goodbye.
9) Funeral Costs
It seems like we are starting to get a bit morbid.
If you have a family member pass away funeral costs can run around $10,000. Even if there is life insurance or estate money, it may take some time before those funds are available. You could be fronting the expense until other money opens up.
Death of a family member is hard enough without adding financial stress to the mix.
I sincerely hope that you do not have to use your emergency fund for funeral expenses.
10) Pet Care
Fido and Fluffy are important members of the family and may need medical care as they get older. Pet surgery costs can be $3-5k, or higher in some cases!
A cat needing surgery to remove an ingested hairpin could cost around $3,000. I'm pretty sure that fits the definition of an unexpected expense. Having an emergency fund goes a long way to helping our furry family members stay healthy.
Having an emergency fund goes a long way to helping our furry family members stay healthy.
Or you could get a snail. My family has a garden snail, named Snaily, for a pet. (This is not a joke, I am 100% serious.) I figure that if something happens to Snaily we could always find a look-a-like in the front yard. But so far we have been lucky to still be on Snaily #1.
11) Cell Phone in the Toilet
I saved the best reason to have an emergency fund for last.
You just bought a $500 phone that has a 100 Megapixel camera, stores 1,000 years worth of music and videos, and can calculate the weight of planets. Then when you are using it in the bathroom (it's ok, we all do it), the phone falls into the toilet.
Oh no! Aside from the immense shame that comes with fishing the phone out, you are also now in the hole $500 to replace the one device that you can't live without.
If pet surgery didn't fit your definition of emergency fund worthy expense, cell phone replacement definitely will.
The Most Important Benefit to Having an Emergency Fund
Surprise financial events cause stress.
Savings in an emergency fund gives you confidence that you can handle life's unexpected events without adding financial worries on top of everything.
In other words, having an emergency fund reduces stress.
Don't be the 57% with little to no savings. Wash your hands, floss your teeth, and make sure that you have an emergency fund.