It’s always worth it to make sure your emergency savings are up to snuff, with experts recommending three to six months’ worth of living expenses set aside, or even more, depending on your personal situation.
Many of us would struggle if we were in a pinch. A Bankrate poll released in January 2020 showed that just four in 10 U.S. adults could cover the cost of a $1,000 car repair or hospital stay with savings. That’s why it’s more important than ever to save.
But there are many reasons why you need to fund your emergency savings. Here are eight.
To give you peace of mind
For a long time, Sherry Andrew and her husband, Jason Wilker, had no emergency fund. Then she lost her job in 2017.
“That completely changed the way we managed our finances,” says Andrew, a 41-year-old financial coach in Ontario. When she returned to work, she deposited all of her income into an emergency savings account while her husband’s income covered necessities. In just over a year, they saved enough to cover six months of expenses.
“It makes us feel secure knowing that if we both had zero income for months, we would still be okay,” she says.
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To stave off debt
Carrying a balance of $15,000 on a credit card that charges 20% interest could mean paying $3,000 in interest over a two-year period. Emergency funds can act as a financial buffer during a time of need instead of having to rely on credit cards or secure high-interest loans.
To keep a roof over your head
Owning a home accounts for about 34% of take-home pay, according to data from the Bureau of Labor Statistics for the 12 months ending June 2018. It’s not just the mortgage payment to consider. “If you own a home, it’s critical to have an emergency fund for repairs and other associated homeownership costs,” says Anthony Copeman, a certified financial education instructor in New York.
To gain quick access to cash
“It can take up to three days for a stock or mutual fund to be converted to cash after it is sold,” advises Taylor Jessee, a CPA in Richmond, Virginia. “If you’re in dire straits you might not be able to wait that long.”
He suggests setting up automatic, recurring transfers from your “every day” bank account to a savings account each time you get paid. “This way, your savings plan is on autopilot so you don’t even have to think about it.”
To avoid liquidating assets
The stock market just had its worst week since the height of the financial crisis.
“Generally speaking, the worst time to need money from a long-term retirement account like a 401(k) or IRA is during a market downtown because you are locking in losses and missing out on the rebound when the market eventually recovers,” says Jessee. He cautions people to have six to 12 months of expenses tucked away because “three months can go by fast if the economy is down and you’re out of a job,” he says.
To maintain a one-income household
If your family is living on one salary, chances are you don’t have as much disposable income as two-income earners. “Make sure you are financially free from worry,” says financial educator Copeman. “If creating a second source of income is too much, stacking money in an emergency fund is your safe haven.”
To keep your cash flow going
Independent contractors and freelancers need to ensure they have extra cash on hand because the loss of a client or less consistent work could spell disaster.
“If you are self-employed, I recommend saving enough expenses to cover a year,” says Misty Lynch, a CFP and Director of Financial Planning at Beck Bode LLC in Boston.
“The reason being you might have to completely reinvent your business if the marketplace changes.”
To change your money mindset
If there is nothing left in the budget, it’s time to re-evaluate your household obligations.
“Saving is a commitment to pay yourself first before obligating your money to someone else,” says Todd Christensen, an education manager at MoneyFit, a nonprofit debt-relief agency in Boise, Idaho. “Set aside 10% of what you have been spending on groceries, gas, dining out, and entertainment.”