Emergencies happen in life. Not only that, but they can often be extremely expensive. That’s why you want to have some money tucked away for a rainy day.
In 2018, the Federal Reserve reported that the average American didn’t even have $400 in the bank for emergency expenses. This under prioritization of emergency funds is … well … an emergency just waiting to happen.
What is An Emergency Fund?
An emergency fund is money that you have set aside for an unforeseen emergency. This is a financial expense that you can’t predict or plan for.
It’s easy to push the need for an emergency fund to the back of your priority list. However, the truth is, countless concerns make an emergency fund a critical part of your finances.
Reasons to Have an Emergency Fund
There are many reasons to have an emergency fund handy. The entire purpose of a fund like this is for unexpected expenses, so you won’t know what it’s for until an emergency arises.
Still, in the interest of convincing yourself that it really is worth having a rainy day fund on hand and ready to go, here are a handful of common emergencies that can be expensive. For many of them, having a rainy day fund can not just help you out, it can even stave off financial disaster.
1. Car Repairs
You may be able to predict car maintenance and paying for gas, but other possible car repairs can creep up on you. If you live in a colder climate, salted roads can corrode the body of your car. If you get into an accident, you may face unexpected auto body bills, too.
2. Home Repairs
Few things are as costly as home repairs, even when insurance contributes a chunk to the costs. Whether it be from an accident or natural disaster, an unfortunate situation can not only leave your home uninhabitable but in need of a lot of extra TLC to make it whole again.
While an emergency fund is important in these instances, the true financial investment should come in the form of preparing for events like natural disasters and other accidents — but even then, you can’t plan for everything.
3. Other Health-Related Emergencies
Along with pregnancy, many other more urgent health-related expenses can sneak up on you. Anything from an unpleasant diagnosis to a slip and fall accident at work can leave you scrambling to pay bills. Even if you can get your insurance or the other party to pay for treatment, you may be left with minor bills or even lawyer fees as you resolve the issue.
4. Losing Your Job
The average number of years that an individual spends at a job these days can be counted on one hand. This nearly guarantees that you’re going to shift employers at some point or another. While you may be able to manage the transition seamlessly, there’s a good chance that you’ll need a rainy day fund to help you get through the shift.
5. Starting Your Own Business
If you have entrepreneurial ambitions, you may want to start your own business. While this can be immensely rewarding, it is also extremely risky. No matter how well you plan things out, there’s a good chance that you’ll need to fall back on your savings at some point along the way.
How to Save Up an Emergency Fund
Seeing the importance of an emergency fund doesn’t mean it will materialize overnight. You still need to create a plan to make it happen. You can do that by:
- Setting reasonable goals: It’s important to set proper expectations. Don’t plan on saving up $10,000 by next week. Start by aiming for $500 in the bank. Then work on $1,000. Eventually aim for three months of income. Start by saving a dollar the first week, two the second, three the third, and so on. Baby step objectives give you something to work toward.
- Review your budget and create a savings plan: The next step is to review your current financial situation. Look over your budget and find areas where you can set aside income. Additionally, consider selling things or looking for one-off gigs to help give you a head start.
- Practice fiscal discipline: Once you have an emergency fund established, it’s important to maintain strict financial discipline as you manage your expenses. Resist the urge to spend the savings on unimportant expenses. Don’t even pour all of it into paying off your debt. Use a strict filter every time you feel you need to pull money from your stash to ensure that it’s a good reason.
If you can follow these three steps, you’ll be much better prepared the next time an emergency arises.
Being Financially Prepared
Many factors go into maintaining your finances. Paying debt, keeping up on your budget, and other pressing matters can make proactive things like an emergency fund feel less important.
However, there is a myriad of reasons that you could need a fund of this nature in the future — many of which are very likely to happen at some point or another. So do your best to save up money today in the name of a less stressful tomorrow.
Dan Matthews is a freelance writer with a penchant for financial wisdom and solid research. You can find him on Twitter @danielmatthews0 and LinkedIn.
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.