Whether you’re downsizing after retirement or focused on saving your down payment for your first home, it’s important to keep adding to your emergency fund. This money might seem unnecessary but it can really help you get out of a pinch. Consider the following reasons for building up an emergency fund, then start working on it.
People often think about needing their emergency fund to cover repairs like a broken furnace or a leaky roof. You probably won’t have expenses like these if you live in a brand-new home but that doesn’t mean you won’t ever encounter repair expenses. For instance, car problems can cost hundreds or thousands of dollars to fix and you need your car to get to work. If you don’t have the money in the bank, you’ll be in a rough spot.
You may be living well within your means right now, but prices fluctuate. Your annual property taxes may go up by $50 a month. Increases in gas prices might mean you’re spending an extra $100 every couple of weeks. An emergency fund can help tide you over until you adjust your budget to accommodate these price fluctuations.
A job loss can be sudden and devastating. Some people are able to get new jobs quickly but others spend months unemployed. This is why many people suggest your emergency fund should be equal to at least six months' worth of your living expenses. You’ll then have a bit of a cushion that will allow you to find your next job without feeling desperate.
If you became sick or injured for an extended period of time, what would happen to your income? Even if you do have benefits, they might not be enough to cover a recovery lasting several months. Don’t take your good health for granted. Things could change in a short period of time.
You might not have to worry about your own health but if a family member falls ill or passes away, you may need to make a trip back home. This might involve expensive last-minute plane tickets, the cost of a hotel stay, and a loss of wages during the time you’re gone. Dealing with family illness or death is hard enough on its own. Having an emergency fund means it doesn’t become a financial burden as well.
Ultimately, the biggest reason to have an emergency fund is to stop yourself from going into debt. Most people can get through financial hardships by pulling out their credit cards but this often prevents you from reaching your goals. Those who have worked hard to get themselves out of debt should be especially concerned about accruing debt again. If you can fall back on the savings you have, you’re simply in a more secure financial situation.
Getting Started with Your Emergency Fund
Hopefully, you’ve realized no matter what your current situation looks like, it’s important to start building up that emergency fund. Consider opening a savings account that’s not easy to access. For instance, online banks don’t have physical locations, so you have to wait a few days to access money. A savings account separate from your primary account is also a good choice.
Once you have a new account, start depositing. Using a big chunk of money like an annual bonus or a tax refund is a good way to begin. It’s also smart to set up automatic withdrawals. Some people ask their employers to deposit a portion of the paycheck into the new savings account, while others simply set up automatic withdrawals from within the account. Even if you can only afford to put $50 in the account each month, it gives you a start. The money adds up.
Emergency funds aren’t just for people who own older homes. Everyone can benefit. Once you start saving, you’ll be surprised at how good it feels.