I Can’t Stress Enough the Importance of an Emergency Fund

The radio is playing as you drive down the road… You’re thinking about your grocery list… And then, out of the blue, your car engine stutters and dies…

It’s every car owner’s most dreaded experience.

[ad#Google Adsense 336×280-IA]It happened to my assistant Laura last year. She put the key in the ignition… But the car wouldn’t start. It sat there, a dead, 3,700-pound inconvenience.

It turned out several things went wrong at once with her 10-year-old car. Her total bill for the repairs, along with the tow service and renting a car for a full week, came to about $1,200.

Unexpected costs are part of life. But around 60% of Americans don’t have enough in savings to cover even a $500 emergency. And the number that can’t cover a $1,000 emergency expense is closer to 70%-80%!

Thankfully, Laura is in the minority. She has an emergency fund to lean on for exactly these kinds of unexpected bills…

I can’t stress enough the importance of an emergency fund.

If you imagine your financial life as a house, an emergency fund should be the foundation. You want to make sure that in the event of an accident or job loss, you have the funds available to pay your expenses.

Typically, financial planners recommend having about three to six months’ worth of take-home pay in your emergency fund. We’ve even seen some recommendations for as much as nine months’ worth of pay saved.

Before subscribing to one of these simple rules of thumb, consider a few things before deciding how much is best for you…

1. Are you single or married?

Single folks with a reliable job don’t need to save as much… But married folks where only one partner has a job (even a reliable one) should have more in savings. That’s because in the event of a job loss, you’ll have to pay bills for two folks instead of one. Married folks where both spouses have reliable jobs don’t have as much risk.

2. What are your monthly expenses?

If you don’t know how much you spend per month, take time this week to sit down and figure it out. Include bills for your home (like rent or a mortgage, utilities, homeowners’ association fees, property taxes, and insurance), as well as car payments, taxes, medical expenses, and living expenses (like groceries).

3. How secure is your job, and how quickly could you find a new one?

Some fields hire regularly, but others might not. Networking is a great way to increase your visibility, and keeping in touch with connections will help should you ever need to find a new job. Age can be a factor, too – although age discrimination is illegal, we know several folks 50 and older who’ve had difficulty finding a new job due to their age and being “overqualified.”

4. What assets could cause you an unexpected cost?

Sudden problems like car or home repairs often require the use of an emergency fund. Some of the most common car or home repairs can add up to hundreds, even thousands of dollars. One important step is to understand exactly what your insurance will or will not cover. Likewise, know your warranty terms and how long they last.

5. Is your health in order?

According to the Kaiser Family Foundation, the average family health insurance plan deductible is about $1,500. Should a sudden accident or illness strike you or a family member, think about whether you could afford to cover the associated costs.

A good solution for this is to open a Health Savings Account (HSA). If you aren’t able to open an HSA, make sure to factor these costs into your emergency fund.

Once you calculate your emergency fund, you can start putting any leftover money to work in other investment accounts that can make you money.

Having a solid foundation is key to having a solid house. The same principle applies to your finances – start with an emergency fund and grow from there.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig


Source: Daily Wealth