Why Have an Emergency Fund?

April 27, 2009

Many people pride themselves on having a good handle on their finances. They pay their bills in full and on time month after month. They manage their credit cards expertly, and even though they could get all the credit they want with ease, they refrain from opening new accounts that they don’t need. But if they do not have an emergency fund, they could still find themselves struggling at any time.

No matter what your income level, having an emergency fund available these days is of the utmost importance. You just never know what could happen. Here are some potential scenarios to consider.

  • You could lose your job. There is virtually no such thing as job security any more. Layoffs happen daily, and often with little or no warning. If you don’t have a financial cushion, job loss could render you unable to afford basic necessities.
  • You could incur large medical bills. Accidents and unexpected illnesses happen to the best of us. If you have to have emergency surgery or spend some time in the hospital, you may end up owing a hefty sum and lose income from being out of work. Without an emergency fund, that double whammy could be financially devastating.
  • The car could break down. Car repairs are rarely cheap. If you do not have any money put back, you could end up without transportation for a while.
  • A major appliance could tear up. Having appliances repaired is often costly, and replacing them can cost a small fortune. But ovens and refrigerators are not things we can easily do without.
  • Home repairs may become necessary. Some may be covered by homeowners insurance, but many are not.
  • A family member could become ill. If it’s your child, you may need to take time off work to care for him. If it’s your spouse, he or she could lose income. Having an emergency fund can make such situations less stressful.
  • See my article on Your Emergency Fund to learn how build up yours.

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    • There are many reasons to have a emergency fund, and you highlight some of the big reasons. Bottom line, having an emergency fund protects your financial interests. As a representative from State Farm, we encourage our policy holders to consider having an emergency fund.

      In general, many economic experts recommend 3 months, but with more people looking for work, many are now suggesting 6 months worth savings if not more. There are a couple of financial calculators available online that help as well. Yahoo has one available at the following link: http://finance.yahoo.com/calculator/banking-budgeting/bud-03. I have also seen the following downloaded worksheet referenced by various bloggers: http://www.moneyunder30.com/emergency-fund-calculator-spreadsheet-now-available.

      We also recommend factoring in premiums and potential insurance deductibles from any and all providers – health, auto, home and life – into their emergency fund. In the event of a claim, specific amounts to cover insurance costs should be included into the amount that is set aside. You never know when an emergency will arise.

      What tools do you recommend when developing an emergency fund?

    • admin

      Miguel – thanks for your thoughtful comment. Many of the calculators that are available underestimate the amount of funds you need to have set aside for an emergency fund, especially these days with the uncertain economic times. Frankly I would suggest you keep up to a year in very liquid funds set aside for emergency purposes. See my article here: http://bankingadvice.com/2009/03/27/your-emergency-fund/

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