We’re all familiar with the unexpected life events that might require you to tap into an emergency fund: you lose your job, you total your car, or your home needs a major repair. However, such dire straits aren’t the only situations in which an emergency fund can help.
To help you make sense of your saving, we’re sharing emergency fund-worthy scenarios and tips on how you can start building an emergency fund. It’s easier than you may think! Keep reading.
What Is an Emergency Fund?
An emergency fund is an easy-to-access source of money earmarked for sudden financial dilemmas. It acts as a financial safety net that can help you cover the cost of those emergency expenses, so you don’t have to turn to other methods of payment, such as a high-interest credit card.
Situations Where You Need an Emergency Fund
Preparation is everything, and a well-funded emergency fund is your best line of defense, especially if you identify with any of the situations listed below.
1. You’re trying to get out of debt.
Getting out of debt is a lot easier when you have an emergency fund dedicated to paying for bumps in the road, such as an unexpected home repair or a medical expense. You won’t have to worry about acquiring even more debt to pay for your emergency when you have an emergency fund tucked away.
2. You only have one source of income.
What would happen if you were to lose your job or illness prevented you from working? It’s even more critical to have an emergency fund if you’re living off one income, whether you’re single or the sole provider in your family.
3. You own your home.
Owning a home is a huge accomplishment, not to mention a responsibility. As a homeowner, you never know when you’ll encounter an unexpected expense, but with an emergency fund, the financial stress will roll off your back.
Home repairs can be really expensive, but you can plan for them. For instance, appliances need to be replaced every 15 years or so, and roofs need to be replaced about every 20 years. Aim to have funds for these major expenses set aside before they occur.
4. You’re self-employed.
Are you self-employed or an independent contractor? Do you have a job that doesn’t allow you to claim unemployment benefits? Then a well-funded stash of emergency savings is non-negotiable. With all the flexibility that comes with being self-employed also comes a fair amount of uncertainty. Work ebbs and flows, and with an emergency fund, you’ll be able to handle whatever surprises come your way.
5. You live far from home.
If you live far away from family, traveling home can be expensive—even more so if you’re doing it at the last minute for an emergency. With an emergency fund to back you up, you’ll be able to pay for the cost of a trip home, no problem.
6. You have medical expenses.
Health care costs are expensive, even if you have insurance. You may have to use sick days, pay for expensive tests, or max out your deductible to get the care you or a dependent need. An emergency fund helps make it a little easier to get through these difficult times.
7. You have a pet.
Our furry friends need medical care just like us, and pet illnesses and injuries can cost a lot of money. If you call the vet for an after-hours emergency or if your pet needs an X-ray and an ultrasound, an emergency fund can be applied to a bill that might otherwise take months to pay off.
8. You have a savings goal.
Saving up for something big like a house or starting your own business? Your emergency fund can prevent you from dipping into the savings you’ve earmarked for that goal if the unexpected occurs.
How Much Money Should I Have in an Emergency Fund?
Experts recommend having enough money in your emergency fund to cover at least three to six months of living expenses. So, what are your living expenses? Anything absolutely essential to your survival, including:
- Housing
- Utilities
- Food
- Healthcare
- Transportation
Where to Keep Your Emergency Fund
Your emergency fund is different from your savings, and therefore should be handled as a separate account. Emergency funds need to be protected but easy to access when you really need them. For these reasons, financial experts recommend opening a money market fund because it’s low-risk, interest-bearing, and easy to access.
Remember: something is better than nothing. Even if you set aside $25 every week for a year, you’ll have put $1,300 toward your emergency fund.
Benefits of Having an Emergency Fund
In addition to the financial stability that comes with having funds reserved exclusively for the unexpected, there are other benefits to having an emergency fund:
- It helps you stress less. Unforeseen circumstances threaten your financial health and stress levels. Without a financial safety net to fall back on, an emergency expense could wreak havoc on your life.
- It keeps your spending on track. Although your emergency fund needs to be easy to access in case of emergency, it helps to maintain a healthy distance between you and your cash. When your emergency fund is out of your immediate reach, you won’t be able to spend it frivolously. Plus, keeping your emergency fund in a totally separate account means you’ll always know exactly how much you have and how much more you should save.
- It prevents you from making poor financial decisions. There are plenty of ways to get cash fast in an emergency, but at what cost? Credit cards, withdrawing money from a retirement account, or asking friends and family for money comes with interest, fees, and potential conflict. An emergency fund will help you be more financially responsible.
Insurance Is Your Best Defense
You can’t tell when the unexpected will occur, but you can prepare for it. In matters of home and health, a well-funded emergency fund and an insurance policy that provides adequate coverage are your two best defenses in the event of a financial emergency.
How can your homeowners, renters, or auto insurance policy keep you covered in a crisis? To better understand your coverage or for a free insurance quote, call 1-800-499-3612 or meet with a Homegrown Pro near you.