You can’t prepare for all the things life will throw at you. Some days it will be car trouble that needs to be paid for, sometimes a friend or loved one is in the hospital, or you or your spouse may be getting laid off. These things, as bleak as the sound, happen. Although we cannot predict when or exactly what will come out our way, we can still plan accordingly for the times that things will go wrong. When these inevitable circumstances happen, you want to be able to still stand financially secure so that you can keep you and your family moving forward.
Here is why you should have an emergency fund, or at least an emergency fund equivalent.
The idea is to spare you from getting into debt.
The idea of having a set aside emergency fund full of money is to prevent you from scrambling to find new money come time you need it. In the case of an unexpected and very expensive event like your vehicle being totaled and you need a replacement, do you dip into your life savings for a fix? Or do you reach into your set aside emergency fund designed to take such hits like this in stride?
In a pinch, it is quite easy to procure funds of various amounts. Sometimes it’s as easy as just pulling out the plastic and swiping, or a phone call to a lender or bank for a loan. All of these options are indeed quick fixes, but will very possibly end up putting you in a heap of debt unless you have a solid way to pay your way through it.
You want to remove, or at least limit, the risk of getting into debt as a result from an unplanned financial expense, and having a form of an emergency account is how you can do that.
Don’t rely on credit.
When surprise but necessary purchases pop up on the radar, the knee-jerk reaction is usually to whip out the plastic cards and start spreading the payments around to cover the immediate cost of whatever popped up. Credit cards can be a valid option for you if you are in a position where you know where the money you need is going to be coming in, and the credit card is just a slight payment delay.
Sometimes financial installment plans are not available, and you need some way to make a payment plan appear. Credit cards can provide that escape when you get cornered, but before you even swipe, think about and begin planning how you are going to pay back the amount as soon as you can, lest you encounter the wrath of interest.
Try to avoid loans from friends or family for quick cash.
When things start getting rough, you may want to seek financial shelter with a friend or family member. Whether it be in the form of a loan or even just a monetary gift, you should not have to get into this position if you planned enough for your future. You should already have the funds you would need to keep you and your family upright in the face of emergency, whether it be through a completely separate account marked “Emergency Fund” or just an over-stuffed savings account.
Even though going to your parents and asking for money may not incur that much of a feeling of shame inside of you (the amount of dignity we feel we lose varies per person), you should not have that be your go-to when things start getting rocky and rough.
As an adult who more than likely has a job that pays more than minimum wage, you should be able to be self-reliant and responsible enough to manage your own finances well enough to at least have a savings account serve as a form of cushion to dig yourself out of whatever life throws at you.
What does your emergency account look like?
We mentioned this before, but let us clarify: you do not need to have a completely separate “Emergency Fund”. What you do need, however, is a financial equivalent that has enough funds to keep the lights on, food on the table, and roof overhead in the event of something like a surprise medical event, car situation, or job loss.
Even if it’s not in its own separate account, you want to ensure that the money to keep life as usual is available and at your disposal somewhere within reach. To find the number that you want to have as a minimum in your account, try this:
Add up your medical bills for an average year. Whether it be just checkups and medications, or that one year where you had to have a surgery done, add up your most expensive medical year. Try to gather enough funds to match this number, and this is now your medical fund. Keep this number in mind.
Now add up your average car bills. This includes your payments on the car itself, as well as maintenance on it, including how many times you had to get replacement tires and a new transmission installed. Add all these numbers together over the course of a year, and you now have a car fund.
Now do the same for your average a year spent on your groceries. Once you have those three numbers (car fund, medical fund, and grocery fund) have enough to cover it for a full year, two years if possible, and have this be available to you as a combined “Emergency Fund”.
This fund does not necessarily have to be set aside and left untouched in savings account growing a measly 1-2% or growth, but can be moved around into other assists or invested in projects and opportunities. As long as you have access to the funds when necessary, it doesn’t matter where the money is kept. As long as you have access to that level of cash as described above, place it where you want.
You don’t need to have the money sitting in an untouched pile to have an emergency fund, you just need to be able to have that kind of money available to you so that when it comes time you do need that kind of money, you aren’t scrambling to find lenders, your credit card, or your family members for cash. Even if you can’t afford that kind of money right now, it’s a good thing to try to build towards as much as you can. It’s the exercise in responsibility that matters here. Happy saving!