Why You Need an Emergency Fund
Like home insurance, an emergency fund is something you never want to have to use, but should really maintain just in case you end up needing it.
Also known as a rainy day fund, an emergency fund is money that you tuck away for future use should any sort of emergency arise. With so many things to save for, from your children’s’ education to your own retirement, stockpiling money for nothing in particular may not seem like a top priority. But there are quite a few reasons why emergency funds are essential, even if they don’t always feel necessary.
To help escape debt
Unexpected costs can end up being the biggest contributors to debt if you end up needing to take out a loan to cover them. And with 40 percent of people in the U.S. unable to cover an unexpected $400 expense, an alarming number of Americans are potentially one bad break away from being thrown into a debt spiral. Having funds readily available can be one less stressful situation that you have to deal with during an emergency.
To weather any unexpected period of unemployment
You may feel like you’ve been blessed with a lot of job security, but businesses, industries and entire economies are all susceptible to sudden nosedives, and those downturns are often followed by layoffs.
Having the ability to support yourself financially while you look for work is one of the biggest reasons to keep an emergency fund. In fact, most experts recommend that your emergency fund have at least enough money to cover three to six months of your basic needs, such as food and housing.
To make ends meet when business is slow
If you’re self-employed, you probably don’t have to worry too much about your boss firing you. However, contractors and other people who run their own business are at the mercy of clients, and when business is down, so are their earnings. For that reason, it’s important for such individuals to have multiple income streams, including an emergency fund that can be dipped into during especially rough patches.
You should also plan extra savings for months that are anticipated to be less profitable, such as the winter off-season that exists in some real estate markets. Contractors and self-employed persons are also advised to keep track of invoices to ensure that they are still collecting all of the money owed to them, which would reduce reliance on an emergency fund.
To cover medical bills
An accident or surprise diagnosis is one of the worst things a person can endure, and the accompanying doctor bill can add literal insult to injury. Going above and beyond your allotment of paid sick days could also reduce your income at the same time that your expenses are increasing.
If you end up developing a serious, chronic medical condition, you could start maxing out your deductible every year. Many people are surprised to find out which things their insurance doesn’t actually cover, but find that an emergency fund can really cushion the blow.
It’s also worth noting that if you receive your insurance through your employer, losing your job could prove costly in more ways than one. COBRA and other coverage options will likely be available, but at a price that may be steeper than what you’re prepared to pay.
To handle home expenses
Tenants may have to worry about an increase in rent every time they renew their lease, but that’s typically just a once-a-year concern. Homeowners, on the other hand, could have to deal with a burst pipe or a pest infestation at any moment.
Unexpected repair costs on top of your monthly mortgage could put you in a bind if you don’t have an emergency fund to draw on.
To pay for a flight on short notice
If you live far away from home, getting back at a moment’s notice can be an expensive proposition. Yet if a family member is unexpectedly hospitalized or worse, you may need to shell out big bucks for a plane ride to be with your loved ones.
To pay for the good stuff, too
Not all emergencies are bad news. Perhaps there’s suddenly a huge discount on an item you’ve wanted to buy, but it’s still pretty expensive. Or maybe you get a great new job or promotion at work, but it requires you to quickly move to a new city with higher rents. There’s even the chance that you and your significant other haven’t been trying for a child, but find out there’s one on the way.
Having an emergency fund to cover such costs can help make sure that such blessings don’t end up feeling like burdens. If you would like to open up a savings account that can be used to help you pay for surprise expenses during times both good and bad, contact a Trustmark financial services representative today.