Top 5 Reasons Why You Need an Emergency Fund

According to research done by the U.S. Savings Education Council and Consumer Federation of America, around two-thirds of the country’s population have some money set aside for unexpected expenses. The idea behind having an emergency fund is to save at least 6 months of your net pay to be able to meet certain essential needs when unplanned events arise. While saving that much cash may seem like a tough thing to do for some people, it’s definitely worth the effort. Raising any amount of money is welcome but those who have at least 3-6 months of expenses in their emergency savings are in a much better position. Read on to see our top 5 reasons why you need an emergency fund.

Top 5 Reasons Why You Need an Emergency Fund

1. Medical Expenses

One can become sick at any time or place even at the most unexpected times and in such situations, an emergency fund is very helpful. The first thing to do when one is feeling sick is to see a doctor, or maybe even visit a hospital. However, most health insurance plans are not comprehensive and certain bills and medical costs or consultations may totally depend on you. These expenses can only be met if you have an emergency fund set aside.

Furthermore, a surgical operation usually costs a lot even if you have an existing health plan. This high charge typically comes from the policy’s deductibles and co-payments. Though some people have flexible spending accounts that can be used to cover a fraction of the out-of-pocket medical expenses, if you’ve been healthy all along without any major medical bills then there is a good chance that you haven’t thought about how much money would be needed if a health emergency were to arise. In fact, it’s estimated that a typical surgery would require around $2,000 paid out of pocket. Certain dental procedures such as removing impacted wisdom teeth can also be covered or aided by an emergency fund.

2. Loss of Job

This is one of the main reasons why people set aside extra cash from their income. An emergency fund helps to provide basic needs such as food and rent when one is still looking for another steady source of income. If you’re still getting a regular paycheck, then the best rule of thumb is to save enough money to cover 3-6 months worth of living expenses. Nevertheless, with the average duration of unemployment lasting around 40 weeks, it would be smart to have an even larger reserve.

In recent years, many companies have been laying off employees due to tough economic times. Sometimes people even choose to resign on their own because of job strains that cause a toll on their body or mind. Whatever the reason, being able to still pay your bills while looking for work is very important.

Moreover, when in the process of looking for a new job, there are certain expenses that will come up such as transportation, preparing resumes and so on. All of these items can be covered easily by having an emergency fund ready in case of a job loss.

3. Home Repairs

house repairs

Unexpected damage to the home can be caused by bad weather or destructive vermin such as termites. A flooded basement or leaky roof can cause water to seep into the walls thus causing paint swells and cracks. These kinds of damages are usually unexpected and not budgeted for, hence the best way to cover these expenses is having some extra money set aside.

Though you may have insurance for the major expenses, if the deductibles are high then this policy may not help that much. Additionally, insurance doesn’t pay for every possible thing that could go wrong with a house, particularly for homes that have undergone renovations. While we definitely recommend budgeting for home maintenance and repairs, an emergency fund is a great thing to have in place just in case the unexpected happens.

4. Car Repairs

Your car can develop technical problems that are inconvenient even after recently taking it to a garage for a checkup. Since this is the main means of transportation for most people, getting it to run as soon as possible is very important. Without a vehicle to get around with, going to work or taking care of the family can be a challenge. But having an emergency fund often means that repairs can be done immediately without ever going into debt.

Sometimes, breakdowns can happen in the most remote locations where even credit cards are not accepted by local mechanics. That’s why it’s always recommended to carry some hard cash from your savings when going on a road trip. Even a debit card may not be sufficient to pay the bills if the damage is too much and in this case, only an emergency fund can be used to supplement the repair costs. Similar to home maintenance, we recommend budgeting regularly for planned vehicle maintenance and upkeep. However, sometimes accidents happen or things just break down out of nowhere and an emergency fund can help out immensely in this case.

5. Unexpected Tax Adjustments or Insurance Premiums

The federal government can increase taxation on certain assets such as housing, trade licenses and so on. If you don’t have cash ready to cover the extra costs, then your business may be closed temporarily, or your property put up for auction. Additionally, the IRS may sometimes offer a refund by mistake and later on include it in your tax report when least expected. To avoid wiping out your account to pay these federal bills, it’s always wise to have an emergency fund.

Moreover, premiums for state-sponsored medical plans such as Obamacare have been skyrocketing lately, with some states reporting increases of up to 100%. For those who didn’t prepare for such inconveniences, it means sinking further into debt due to paying for the increased premiums.

In summary, the most common reason why people set aside emergency funds is to avoid getting into debt, especially for expenses that can easily be avoided. A recent survey showed that 31% of respondents with credit card debt experienced difficulties reaching their personal financial goals, with each having an average sum of $5,000 to pay off the creditors. Had this group of people invested in an emergency fund, it would have been possible to avoid sinking into debt in the first place.

If you don’t have enough money set aside to cover unexpected events, then it could mean relying on your credit cards, taking a loan or tapping into a retirement account. This may leave you in debt and without enough financial resources to meet your immediate needs. Therefore, if you’re already employed or have a steady source of income from other ventures such as a business, this is the right time to start an emergency fund for unexpected expenses that may come in the future.


Brett Jackson

A penny pincher and investor in my own financial freedom. Want to your financial product or service on penny bros? Hire Us

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