Why You Need an Emergency Fund

Blog Post01/19/2017
Debt Management

Whether you’re just learning to be financially self-sufficient or you’ve been paying your own bills for decades, you’ve probably heard it said a million times: “You need an emergency fund!” But how much do you need, and how can you get there?

Why You Need That Emergency Fund

When your income is steady and you have control over your debt, an emergency fund may seem like a low priority. But accidents happen with no warning, and having some money stashed away is a safety net for the unexpected, such as:

  • Losing your job;
  • medical or dental emergencies;
  • Sudden veterinary visits for your pet; and
  • Unexpected home repairs, such as replacing a water heater or refrigerator.

If you’ve budgeted for an emergency fund, you’ve got these situations covered. At the very least, it will give you peace of mind to know that you’re ready for whatever life sends your way.

How Much Do You Need?

For years, the sage advice was to save three to six months’ worth of living expenses. But according to Kiplinger, the average length of unemployment is 37 weeks, or about nine months.

That number does come with some variables. If you live in a two-income household, a job loss won’t mean losing all of your income — your partner is presumably still earning, so you won’t need to make up the total of your living expenses. If you’re eligible to receive unemployment, you’ll only need the difference between those benefits and what you were earning, at least for the first six months or so while you collect. And you can bring that monthly figure down a bit by reducing your living expenses, perhaps by eating out less or dropping some expensive services that you’re paying for now.

In many cases, six to 10 months of saved living expenses could help cover other potential emergencies: blown water heaters, medical emergencies or a down payment on a new car.

How to Save an Emergency Fund

The same advisors who say you needed an emergency fund will also tell you to save about 10 percent of your income each pay period, in addition to what you put toward retirement. Of course, you’ll want the account to be accessible so the money is there when and if an emergency arises. By the same token, the money shouldn’t be too easy to get to. Don’t attach a debit card to the account. Out of sight means out of mind (and future peace of mind).

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