Why You Need an Emergency Fund
An emergency fund can provide invaluable peace of mind if you find yourself facing unexpected expenses.
In my last entry, I discussed how my husband got into a car accident that meant the end of our beloved 13-year-old car (although no one was injured, thankfully). It also meant we needed to buy or lease a new car.
The expense of buying a new car can be daunting, but I was incredibly relaxed about the entire thing. Now, why would that be? The damaged car was worthless and had to be scrapped. We would have to spend a fair amount of money on a new car. Plus, since the accident was my husband’s fault, we were responsible for the damages to the other driver’s car.
The reason I felt so calm was that my husband and I had plenty of money socked away in our emergency fund.
Physician’s Money Digest has written fairly often about the importance of setting up an emergency fund because polls and surveys regularly report that far too few people have one. For example, the Bankrate Financial Security Index in June 2012 revealed that 28% of Americans have no emergency fund whatsoever.
Your emergency fund shouldn’t overlap with your house savings fund or your retirement fund or your child’s college fund. It needs to be a separate account that you can easily access in the event of (you guessed it) an emergency.
We’re not talking about the few hundred dollars you might have stashed around the house, under your mattress, in the freezer, or under the floorboards. Ideally, an emergency fund needs to be large enough to keep you afloat for at least 6 months in case, for instance, you find yourself unemployed or you get into a car accident. (The Bankrate index also revealed that just 43% of people had enough in their emergency fund to cover at least 3 months’ worth of expenses.)
Unsurprisingly, those with higher incomes are more likely to have a sufficiently flush emergency fund. But even if money is a little tight, you should be able to put some aside.
The American Institute of CPAs suggests that each month, after you cover the basics (health care, food, shelter, etc), you should put some money away in your emergency fund. If you have to pay off debt (like student loans), you should split the money, even if it means putting just a little each month into the emergency fund. You’ll be amazed at how much it all adds up to over time.
Plus, you’ll be truly thankful for that emergency fund if you suddenly find you need a new car.
Have a question about how to handle your own financial challenges? Send it to us at firstname.lastname@example.org.