You never expect something bad to happen.
But that doesn’t mean you shouldn’t plan for it.
In today’s world, so many situations can go wrong in the blink of an eye that can impact your finances. With so many people living paycheck to paycheck, putting aside additional savings can be an added burden.
This post shows how having a safety net can prevent an even greater burden if you don’t have money put aside. But first, let’s look at what assets fall under emergency funds.
What Are Emergency Funds?
Emergency funds are cash reserves composed of liquid assets, which are funds that can easily convert into cash. In other words, it is money that you can access quickly to pay your expenses.
Liquid assets include checking or savings accounts, money market accounts, cash, or a prepaid card you can load money onto. Regardless of what type of emergency funds you maintain, ensure they are kept in a safe, secure location.
An essential part of putting aside emergency funds is not to use that money for any regular or extravagant purchases. It may even make sense to put it into a separate account so it isn’t lumped in with your everyday funds.
Three Reasons Why You Need Emergency Savings
Depending on your specific circumstances, you could have several reasons for putting aside funds for emergency purposes. Here we’ve listed the top three reasons why it’s crucial to have emergency savings.
Loss of Income
Gone are the days of having a secure job until the day you retire.
If you were in the workforce during the Great Recession in the mid-2000s, then you know exactly what I’m talking about. Companies closed, industries crumbled, and people lost their jobs. You could also say the very same thing about the lockdowns that occurred throughout 2020 – 2021. And currently, we’re starting to see a large number of layoffs in the tech industry.
My point remains the same. No job is safe. No matter the industry, how long your employer has been in business, or how much you’re valued as an employee.
I don’t say this to be an alarmist or scare you. But when you work in the mortgage industry, the last thing you expect is for the entire industry to take a hit. However, in the 2000s, it did in a major way.
So, if you were to lose your job today, would you be prepared? Would you be able to access funds to pay your expenses?
Sure, you can always go out and get another job, but how long will that take?
According to the U.S. Bureau of Labor Statistics, the average person looking for a job is unemployed for approximately 19.5 weeks or about five months.
Of course, you could have connections and may be able to get hired within a few days. Do you want to risk not having anything saved up and take that gamble with your finances?
Illness or Injury
In a world filled with diseases, like cancer, that have no cure, medical expenses are among the highest, if not the top, reason why people file for bankruptcy.
Even though we may be vigilant with preventative medicine and have a healthy lifestyle, there’s no guarantee that we will remain healthy. Combine that likelihood with aging, and you could end up with medical expenses that could overwhelm your financial situation, especially if you don’t have adequate medical coverage.
Another factor that you can’t necessarily plan for is injury due to a fall or a car accident. This type of injury could range from minor to severe, regardless of age. However, it’s not just the accident itself that is the problem.
The more serious the injury or illness, the more you could miss work. If you don’t have a large PTO reserve or some form of disability insurance, you could be faced with a mountain of medical bills along with reduced wages.
Natural Disasters
Depending on where you live in the U.S., you are at risk of experiencing earthquakes, flooding, severe thunderstorms that often come with hail, blizzards, tornadoes, or hurricanes. Even extreme heat or cold could cause problems.
Any one of these natural disasters could result in injury, loss of life, damage to or loss of property, or power disruptions. If you are injured, you’ll need medical care, which means unexpected bills. If there is any damage or loss of property, you’ll have to live elsewhere while repairs are made. This could mean renting an apartment or house or staying at a hotel for several days or potentially weeks.
There is also the possibility that you won’t be able to work during this type of event. Your office building could be damaged or impacted by power disruptions. Some companies might get by with some people working from home. Other workers, like those in the service industry, won’t have that option in most cases.
How Much Should You Have Available in Emergency Savings?
For all three situations above, having access to liquid assets won’t stop the events from happening but could help you navigate them much easier. You also won’t have the added stress of worrying about how you will afford the unexpected expenses.
With that said, how much should you have in your emergency fund?
How much money you have saved in your emergency fund will depend on the monthly expenses you incur for your household. Most experts state that you should have at least six months’ worth of living expenses saved up in case of emergency.
You might want to have more saved up if you have a high risk for injury or illness, work in a saturated industry, or live in an area prone to natural disasters. If any of those scenarios apply to you, it might be best to have at least twelve months of expenses in your emergency savings fund.
How to Build an Emergency Fund
Even though trying to save money may seem overwhelming, there’s no better time to start than now. It may be easier to start small and gradually increase what you save over time.
Take a moment to assess your incoming cash flow. Then, determine if you can spare a specific amount per week or month to set aside. Even if you start with $5 a week, it’s better than nothing. As your salary increases, you can add to the fund, or you can put more money aside if you receive a bonus or tax refund.
You can add another account to your direct deposit so that a portion of your check goes to the designated fund. You may also be able to set up a bill pay transaction with your bank to transfer the money to another account on a regular basis.
What are some other ways you can utilize funds for an emergency? Here are some other sources of funds if you find yourself short on cash:
- Home equity loan
- Line of credit
- Retirement account
- Credit cards
- Whole life or universal life insurance policy
- Part-time job or side gig
Keep in mind some of these options should only be considered in an emergency, while others can provide an excellent secondary income. The loan, credit, and retirement account options will also likely cause your expenses to increase in the near future or could have tax consequences.
The key issue here is to start saving now so that you won’t be faced with making financial decisions in a desperate situation. Create a budget or analyze your cash flow to see how you can maximize your savings in the event of an emergency. How has having an emergency fund helped you in the past? Share your comments here.
