Financial experts often talk about the necessity of having an emergency fund. An emergency fund can help cover any expenses that arise when unexpected problems or emergencies crop up in your life. Unfortunately, the unexpected does happen, and it’s important to have made preparations when this happens. Here are a few reasons that it’s worthwhile having an emergency fund
If you suddenly lose your job and you don’t have a second income to rely on, you’re going to need to find a new job as soon as possible to pay your rent or bills. If you can’t find a new job right away, an emergency fund will hopefully help cover any expenses you need to pay in the meantime. While some people differ on how much should be in your emergency fund, enough to cover three to six months of expenses is usually the agreed upon amount.
What happens if you suddenly become ill and have to go to the hospital? Or maybe you’ve been put on a new, but expensive medicine. If you have insurance, it might only cover so much before you have to pay out-of-pocket. If you don’t have insurance, the amount you’ll have to pay will be even more expensive. Having an emergency fund stored away might not help you pay for all the related expenses, but it could help you eliminate some of the bills.
If you own a car, especially an older one or a used one, you probably hope that it won’t suddenly break down. Car repair can be very expensive and you’ll only be frustrated by an unexpected problem that you can’t immediately pay for. After all, if your car is in dire need of repair, you won’t be able to continue driving it until it’s fixed. An emergency fund can cover the payment of any problems that unexpectedly occur.
Do you have a leaky roof or pipes? Or maybe your radiator or washing machine has broken. Maybe you desperately need to replace your toilet or refrigerator but have been putting it off for lack of money. Repairing or replacing these issues is usually expensive and if something starts leaking or breaks without warning, it would be nice to have money tucked away somewhere to immediately replace it. There are certain issues that need to be fixed immediately, for instance, and you don’t want to have to put those off and cause yourself further inconvenience.
Just as no one can predict an unexpected health issue or home repair issue, sometimes weather can be unpredictable. What happens if a hurricane destroys part of your home or if a flood destroys your car or apartment building? While home insurance might cover some things, you’re going to need emergency money to cover the rest of the damage and to replace your belongings.
A lot of people have experienced a family emergency such as a close family member falling ill, losing their job, or coming upon hard financial times. If you’re close enough to your family and financially stable yourself, you might want to lend a hand. An emergency fund would allow you to give them financial assistance.
Have you ever applied to a job or school in a different state and wondered how you were going to pay to move? Moving can be pretty expensive and most universities and colleges don’t cover moving expenses. Unfortunately, fewer companies are offering compensation for moving as well, leaving the burden entirely on the employee. If you suddenly find yourself in the position to move to a new location, you’re going to need money to cover shipping your belongings as well as the cost of buying a new place or paying first month’s rent and a security deposit.
An emergency fund is also good for events such as funerals, weddings, pregnancies, or other unplanned events that suddenly pop up in your life. Sometimes these events cost more money than you currently have in your bank account. For instance, you may need to fly across the country for a sibling’s wedding. Or you may find yourself having to scrape together money for a child. Like most unexpected events on this list, an emergency fund will allow you to dip into that bank account to cover costs you hadn’t expected to spend.
Rise in Cost of Living
Have you ever rented an apartment and been surprised by the sudden spike in rent when you renew your lease? Or maybe you’ve hated the way everything seems more expensive now that the economy is worse. A fluctuating economy might mean you’re struggling to pay bills or rent when the cost of everything else is on the rise. If you’re being accosted by the rise in the cost of living, an emergency fund will give you the ability to cover those costs until you can find a better financial alternative.
Money is Better Than Assets or Investments
Most importantly, an emergency fund is a great thing to have because cash can always be used. A lot of people depend on assets or investments to cover them in the case of an emergency, but assets and investments are not always guaranteed or readily available. An emergency fund of cash is readily available, however, and will be better suited toward helping you alleviate your current financial problem.
(Photo courtesy of Ed Yourdon)