An emergency fund is a crucial component to leading a healthy, secure financial lifestyle. However, many people tend to put off developing their emergency fund because it is hard to commit money to an account where it will just sit untouched for, ostensibly, ever. There are so many other places where you can see the effect your money has: paying off student loans, mortgages, credit card debt, and more.
Despite the many arguments that can logically lead to investing your money elsewhere, creating an emergency fund is one of the most important things you can do with your finances. Bank of America suggests that your fund should include enough money “to cover your major expenses for 6 months to a year”. That may seem like an unreasonably large amount of money, but once you consider these two simply circumstances that could happen to anyone at any time, you’ll understand why.
When You Can’t Suddenly Can’t Work
Although the economy is in recover, it still is not quite stable. Shaky job security is just one element that contributes to unexpected loss of work, though.
- You’ve Lost Your Job: The current rate of unemployment in the USA is 5.1%. Finding a new job can be difficult, for some people more than others. FiveThirtyEight Economics found in its analysis of long-term unemployment that “men are a bit more likely to become long-term unemployed than women; blacks are more likely than whites; and, most significantly, older worlds are more likely than younger ones.” Having an emergency fund can allow you to focus on finding a new job without the added stress of being unable to meet basic daily needs while you search and apply.
- You’ve Been Injured or Become Ill: The United State Department of Labor has two laws that it oversees designed to address “when employees are injured or disabled or become ill on the job”: the Americans with Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA). Although you may be entitled to some sort of Workers’ Compensation or Medical Leave, having an emergency fund can not only help with medical treatment but also with the sudden loss of income – a sure blow to your finances.
When You Have Unforeseen Expenses
Poet Robert Burns coined an invaluable phrase for saving finances: “the best laid schemes of mice and men.” Even the most meticulous list-makers and think-aheaders can be blindsided by life, and having an emergency fund ready can save you from what you didn’t even know was coming.
- Your House Needs Work: Homes cost a lot of money, and even the most experienced homeowners can be caught off guard, sometimes. Fortunately, an emergency fund can save you from your own naivety, Mother Nature, or an excellent asbestos investment made by your 1960s contractor. CNBC compiled a list of 20 Hidden Costs in Home Ownership, which range from Property Taxes to furnaces to construction down the street. An emergency fund, put away for a rainy day, could save your finances when that rainy day leads to leak in your ceiling.
- You Suddenly Have a Death in the Family: According to the National Funeral Directors Association, the average 2014 cost of an adult funeral with a viewing came to $7,181. A cremation and viewing takes the price down a bit, coming in at $6,078 on average. Even when it comes to the death of a beloved pet, prices range from $50-$1,200. Death is a time of deep emotional stress, but with an emergency fund, it does not have to be a time of significant financial stress. An emergency fund can save you the time and worry associated with a sudden departure, which you can then put towards the grieving process instead.
- You Suddenly Have a New Member in the Family: On the other hand, it turns out birth is significantly more expensive than death. Raising a child can be incredibly expensive, but even just having one can be a huge blow on your finances. In 2012, the average amount paid for conventional delivery in the USA was $9,775, and for a Caesarean birth, the average was a whopping $15,041. Keep in mind that this amount includes only the birth itself – not the medical appointments during the pregnancy, ultrasounds, blood testing, neonatal vitamins, Lamaze courses, maternity clothes, or any of the hundreds of other expenses associated with pregnancy. An emergency fund can give you the financial flexibility to do things like extend maternity or paternity leave, find high-quality childcare, or even improve your insurance package.
[Read: Ways to Save Money]
Don’t wait until it’s too late to save your finances. By creating an emergency fund, you’ll be prepared for the unpredictable, and you’ll improve your peace of mind. Life is wonderful, but it’s full of surprises, and some of them can be ridiculously expensive.