You’ve heard it before and you’ll hear it again—establishing an emergency fund is of vital importance to your financial health. As self-explanatory as a financial term can get, an emergency fund basically is a stash of money that you set aside in case of, well, an emergency. Life likes to throw us unexpected surprises, and unfortunately, the bad can come just as suddenly as the good. To avoid the stress of being completely caught off guard financially should such an event arise, you should habitually designate a portion of your income toward such a fund. Below, you’ll find some realistic reasons as to why an emergency fund is necessary.
What constitutes an emergency
First, it’s important to note that an emergency fund should only be used for a real emergency. For example, a medical expense, a home or car repair, or suddenly finding yourself unemployed all constitute reasons for which you can dip into your emergency fund (see more below). An emergency fund shouldn’t be used for a vacation, a new wardrobe, or the latest iPhone upgrade. Nor should it be used for things that may come up, such as back to school supplies for your kids or for holiday gifts—things such as these should be included in your yearly budget (i.e. miscellaneous expenses, etc.).
Why you should have an emergency fund
You’re new to budgeting
If you’re new to budgeting, you may find you need to adjust in the future as some hidden expenses you forgot to include may arise. For example, you perhaps planned on buying a new car, thus budgeted for car payments but forgot to include insurance in your budget. Or perhaps you forgot about taxes—as these unexpected expenses arise, you should adjust your budget to include them. To cover the expenses for the first few months as you get used to your budget, you can dip into your emergency fund.
2 – You’re self-employed or a gig worker
If you’re self-employed or an independent contractor/freelancer, your income isn’t steady and may ebb and flow dependent upon your contracts. While planning ahead may help you avoid any down time between contracts, sometimes it’s unavoidable. An emergency fund can be a backup (to cover your non-discretionary expenditures) for times when business is slow. Additionally— if you’re a gig worker or self-employed—you most likely wouldn’t be eligible for unemployment benefits if you suddenly find yourself without a job (knock on wood). An emergency fund can be a lifesaver in such a case.
3 – You have medical concerns
We’d love to be able to say all medical expenses are covered by insurance, but that’s not always the case (especially if you live in certain countries). Not only can base medical fees be high, but there can be so many additional costs that add up (think blood work, specialists, etc.). If you have a medical condition that requires extra care and expense, you most definitely should have an emergency fund. This is also (and especially true) if you suffer from mental illness—there still is a lot of stigma surrounding it, unfortunately, and sometimes it’s not always covered. You may have to miss work for a mental health day, and perhaps that isn’t covered under your sick leave. Any medical condition, for that matter, may cause you to run out of sick days at work—thus, an emergency fund can help fill the financial gaps.
4 – You have children or are hoping to have children
As much as you may like to think otherwise, having children means your life is that much more unpredictable and complex. As much as you can try to include expenses regarding your children into your budget, unexpected situations can arise. Your child could get hurt or sick, which means not only would you have to pay for the medical bills but you’d either have to pay for someone to care for them or stay home from work. They could make a sports team, or try out for the school play…all requiring additional funds to cover equipment, etc. Perhaps you don’t have children, but would like to in the future—unless you’ve taken secure steps to avoid it, an emergency fund can make all the difference if an unplanned little someone comes into the world. Children definitely are way more expensive than you can plan for, especially if you’re on your first one. Luckily, you learn how to budget better as you go.
5 – You’re a homeowner
The joys of owning your own home can be less than stellar when unexpected repairs are needed. While you should factor regular repair, upkeep, and maintenance into your budget, emergency situations may arise. Perhaps your plumbing bursts, and you need a plumber before your whole place floods. Or perhaps your furnace goes out in the middle of winter and you need a replacement—these are situations in which an emergency fund can come in handy (repairs, handy—see what we did there?). As we stated before, if you’re new to budgeting and new to home ownership, you’ll come across regular expenses that you’ll need to adjust your budget to cover—taxes, upkeep, remodeling, etc. Talk to other homeowners before you buy, so you know the ways in which it may stretch your finances.
6 – You’re in debt (and trying to climb out)
Debt—depending on where you’re from, it can be a regular part of life (think student loans) or a far-off concept. If you’re attempting to climb out of debt, an emergency fund can help you to not plummet back down if something unexpected happens. Perhaps you went into debt after you lost your job—you had to pay for a car repair and had to buy groceries. An emergency fund can be helpful should such a situation arise and will help you to stop just adding to your debt.
7 – You’re the sole earner
If your household gets by on one income, you may be in dire straits should that income suddenly disappear. If you’re in a dual income household, the loss of a job isn’t as big of a blow because you can still count on the other’s person’s income. If you’re the sole earner and are unfortunate enough to lose your job, an emergency fund can help you cover your expenses while you look for other employment.
Of course, there are infinite emergencies that could arise, thus infinite reasons to have an emergency fund. Perhaps your identity gets stolen, or your elderly parents get scammed (there are tons of scams out there that target the elderly—for shame—so be forewarned if you have older family members). Perhaps you decide to take an offer for your dream job with a startup, but it means a pay cut and a relocation. Anything can happen, and an emergency fund—while it may not seem necessary at the moment—will be something you’re eternally grateful for when it’s needed.
Sure, it’s important to think positively and to not dwell on the negatives—just make sure your finances are prepared for them.
We’ve covered the whys—stay tuned for future posts where we’ll delve into the hows, whats, and wheres of emergency funds.