An unexpected expense, such as a broken appliance or major car repair, doesn’t have to ruin your finances. Prepare for the unexpected with an emergency savings fund.
If you haven’t started your emergency savings yet, you’re not alone! Over 63% of Americans don’t have enough money in savings for a large unexpected expense. When it comes to surviving a truly crippling financial hardship like job loss or disability, less than half of those surveyed said they had enough in the bank to cover 3 months of major expenses.
That’s scary news when you’re out of a job. While the employment rate has improved in the past 5 years, job seekers will still average anywhere from 6 weeks to a few months before landing their next role. And unfortunately, many will take a wage cut to get there.
We get it, saving for the unexpected is less exciting than contributing to vacation and holiday funds. But, the peace of mind when an emergency occurs will make you feel monumentally better in the long run. Skip the financial stress by preparing for these and other emergencies:
An emergency fund is meant to give you financial support in your time of need. This money needs to be accessible, so instead of having the funds wrapped into say a retirement savings account or certificate of deposit (CD), your cash should be in an account that’s easy to pull from.
While your ideal emergency fund is unique to your financial needs, the formula is the same for everyone.
At the very least, every household should save 3 to 6 months’ worth of its major expenses, such as rent and health insurance.
You may be surprised by how quickly major expenses add up in just 3 months. Consider $1,500 in housing, $500 in health insurance, another $500 in groceries and phone bills and you’re already looking at needing $7,500 in savings for a 3-month cushion. For many, education costs, loans and car payments tack on another $500 per month.
While the main purpose of an emergency fund is to help you pay your bills if you lose your income, the funds can also help you in the case of an unexpected issue, such as your car’s engine going kaput. The goal is to keep you from turning to creditors, borrowing from family or dipping into your retirement account. By skipping a loan, and instead relying on your emergency savings, you’ll avoid needing to pay more in interest to collectors or losing out on accruing interest with your active savings products.
Here’s some key advice to keep in mind: by using your emergency savings you’re still in debt to your future self. Be sure to replenish your emergency savings once you’re back on your feet to support your future financial needs.
Rent or mortgage
Renters or home insurance
Household products and supplies
Food and beverages
Pet food / supplies
Remember: If you lose your job, you may be able to stay on your former employer’s health plan for up to 18 months, but you’ll spend a lot more on that same insurance.
Monthly prescriptions and other co-pays
If you are paying for a child’s college or private school, make sure you have enough saved up to cover potential disability or job loss. Some school loan providers will let you defer payments in the event of an emergency.
Tuition for children’s school or college
Home improvement loans
Cable / Internet