Some people pride themselves on having a good handle on their finances. They pay their bills in full and on time each and every 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 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.
Some argue that they do not need an emergency fund because they have credit cards. It’s true that credit cards can be useful when something unexpected comes up, but you will have to pay interest on any amount you charge unless you pay the balance in full right away. If you’re on a tight budget, the last thing you need to do is rack up more debt.
So how much should you keep in your emergency fund? Most experts recommend a goal of three to six months’ pay. That sounds like a lot, but job loss or disability could keep you out of work that long or longer. It will take some time to build up such reserves, but it can be done with consistent saving each month.
When the unexpected happens, having an emergency fund can prevent it from sending your finances into chaos. By including a set amount of savings in your monthly budget, you can have a financial cushion to fall back on if needed.