In the case of an emergency, it is very important that you are prepared financially ahead of time, instead of being blind-sided and left with the worry of how to pay for an unexpected expense. Having an emergency fund is a way to be prepared for an unforeseen financial burden.
Your emergency funds should be set aside in a liquid account so that you have quick access to the monies. Having access does not mean going into the account to pay for lunch because you forgot your wallet, or you are low on funds and this will hold you over until payday. This account is reserved for specific reasons, EMERGENCIES, or personal/family crises. In the case of a crisis, this account is to prevent you from adding to your debt total, such as the need for additional loans or increased credit card usage. Another important factor for this account is to prevent wiping out your savings account, which is designated for short-term, long-term, or retirement goals. To be specific, here are 8 examples of unexpected expenses and reasons to use your emergency funds:
This is typically the primary reason for the use of emergency funds. If you no longer receive a regular paycheck due to being fired, laid off, downsized, or you quit, you will need funds to cover your expenses until a regular paycheck resume.
An emergency room visit can create a financial burden, with or without medical insurance. With medical insurance coverage, you are still responsible for deductibles and co-insurance payments. If you have a plan with a higher deductible to allow a lower monthly premium, you could be responsible for a deductible of up to $7,000, per person. Could you image a deductible of such for a husband and wife, if they are involved in the same emergency? Without insurance coverage, you are responsible for the entire cost of services. In the case of a dental emergency, you also are held responsible, with or without dental coverage. With dental insurance, there are deductibles and co-insurance payments that apply to coverage. Keep in mind, the co-insurance may be higher than what you are used to with medical insurance. You could be responsible for 50% of the cost of dental services. Without dental insurance, you are responsible for 100% of the cost of services.
You may have car insurance to help repair your car if you are involved in an accident. But what coverage do you have if the car breaks down on the side of the road? The cost to repair or replace an engine or a motor can be costly. What about the expense to fix a flat tire, or two tires? With all the construction taking place throughout every city, new housing developments and new office buildings, nails seem to find a home in your tire(s). Depending on the type of car you own, the cost to purchase a new tire or two can strain you.
You may have insurance to cover major misfortunes. But there are numerous expenses that you will incur as a homeowner, this is not an IF it will happen but a WHEN it will happen. Anything could go wrong such as a plumbing issue, an electrical issue, a garage door issue, a heating and cooling issue, or even a structural issue such as a need to rebuild a balcony. Those examples are repairs to your home, what about repairs in your home, such as your appliances that will need to be repaired or replaced. If your washing machine stops working, think about the many trips to the laundromat you will have to take.
Unexpected Travel/Loss of a Loved One
A loss of an out of town loved one can force you to purchase a last-minute plane ticket to attend the funeral. You do not want the extra stress of worrying about this expense during this sensitive time. All your strength will be needed for the grieving process as well as to provide comfort to other grieving family members.
The cost of caring for your pet’s daily needs can add up. But are you prepared to come out of pocket if your pet needs surgery? I know you don’t want to think about your furry friend getting sick, but you must be prepared if it should happen.
Having a job in a large company that has locations in multiple states, can provide numerous opportunities to advance your career. What if your dream job becomes available in another state? Unfortunately, not every company covers moving expenses. Do not let the lack of money to cover your expenses stop you from taking on a new position with new possibilities.
There seems to be some type of change in the tax laws every tax season. Just because you have been receiving a tax refund for the previous years, you never know when the law may change, and you get stuck with an unexpected tax bill. For those that have experienced a tax bill, you know that this is not a bill to disregard. If you do not have the funds to pay the bill in full at the time it is due, you will receive a new tax bill with interest and penalties added to what you previously owed. This bill is not like a typical credit card or loan debt. As they say, “Uncle Sam does not play.” Having emergency funds to cover this type of expense will eliminate the stress that this bill will most definitely cause.
In recent years, the amount needed in the emergency funds account has increased. In past years, the needed amount was equal to 3 – 6 times the amount of your net (take home) monthly income. Now, that amount has increased to 12 times your net monthly income. Do not get discouraged as that amount can be overwhelming. The key is to take it step-by-step and start with one month at a time. If saving your income is too difficult, you must at the very least save enough to cover your essential monthly expenses, such as shelter including utility bills, transportation and food. If you need help determining the amount you must save for your emergency funds account, please contact me for a consultation.