Why You Need an Emergency Fund

claudiaBlog, Personal Finance1 Comment

The other day, I left my house on a bright weekday afternoon to run a quick errand and I was greeted by this…

broken window_censored
As you can imagine, I can’t say that I was in any way pleased… but I do live in transitional neighborhood, so I’m learning to be prepared for the unexpected.

After my initial shock, I’d say my next emotion was annoyed. No getting around it. BUT what I didn’t feel was anxious or worried about how I was going to pay to fix it.

This is the peace of mind that comes with having an emergency fund.

This moment perfectly fits the definition of an emergency fund:

  • an unexpected expense
  • has to get resolved quickly
  • immediate and urgent situation

According to a study from FINRA to assess how vulnerable people are with their finances: “Almost 40% of individuals in the United States either could not or probably could not come up with even $2000 if an unexpected need arose.”

So if this statement applies to you, know that you are not alone…

“The reality is an unexpected expense can pop up at any time and can happen to anyone.”

  • You could get in a fight with your roommate or significant other and decide you need to move out on your own. Now you are responsible for all the rent and utilities, not just a portion.
  • you get laid off from your job with a small sum of severance that only covers you for 2-4 weeks.
  • The car you use to commute to work every day breaks down and needs expensive repairs
  • A valuable piece of your property is damaged, vandalized or stolen.
  • Etc

So when these ‘life happens’ moments occur, you don’t want to be stuck scrambling and stressed, trying to figure out how you can pay this major and unexpected bill. Or being forced to charge it to your credit card, in the hopes of paying it off down the road.

What you want instead the cushion of a financial safety net. AKA an emergency fund.
entrepreneur-net

So how does it work?

The rule of thumb varies by who you ask, but its safe to shoot for a minimum of 3 months of critical expenses. These are the bills that qualify as needs NOT wants. This includes bills that you are legally or contractually obligated to pay.

If you want to be more conservative and have a super thick cushion. (In my mind, I’m imagining a Tempur-Pedic mattress)… shoot for 6 months.

Imagine how that will feel… 🙂

 

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