Emergency Funds - Why do I need them?
Emergency and unpredictable situations surprise us once in a while. For that reason, we must be prepared to act and not destroy our finances. So many people don’t consider creating an emergency fund that is completely separated from their savings. In doing so, they can be in trouble.
Emergency funds are reserves on your finances which allow you to act when an unforeseen situation comes your way. It can be a health issue, a job loss, an accident.
Emergency Funds will be different for each person.
Remember that insurance policies are part of your emergency funds.
Identifying Potential Emergencies
When Emergency Funds are calculated you need to look at your list of savings and expenses.
The list should then be checked for items that could create emergencies.
Here are some instances to check out:
Rent :
Rent could be considered a minor emergency if you’re always struggling at the end of the month.
If you can’t pay the rent you will be in a bad position.
Car:
If you have a car, you need to ask yourself does it looks good? Do I need to start saving for a new one? In case of an accident, if you don’t have insurance, your finances will take a hit rectifying the situation. Car Insurance is a big help during emergencies.
House:
Wherever you live, you will need some homeowner’s insurance in case of theft or accidents. If you don’t have insurance and you are burglarized then you’re in trouble.
Medical Expenses:
Most medical and dental insurance policies cover only part of the expenses. If you have a major medical or dental problem it could cost you a lot. If you don’t have medical and dental insurance you won’t be ok. Even with the insurance, you might experience money issues too. It will depend on what type of emergency you are facing.
Living from Paycheck to Paycheck:
If you’re always living paycheck to paycheck and an emergency comes up how will you pay for it? That is a tricky situation. You might need to rely on loans, credit cards, or family support in such an adverse time.
Other Expenses and their impact:
Such things as groceries, clothes, entertainment are never covered by insurance. If you do pay for the emergency, then other parts of your budget will suffer. You might have to scrimp or go without entertainment or you might have to use your credit card. All of those choices will negatively impact your lifestyle and your budget.
Building Your Emergency Fund
The way around this is to look at all of your savings and costs and figure out how well any insurance covers you. Then you have to look at all of your savings and expenses that aren’t covered by insurance and decide how much you like to do those things each month.
Then you have to put a dollar value on everything by figuring out how much each item costs to replace it or how much it costs to pay for things over a few months.
In the end, it has been calculated that 3-6 months salary is a reasonable amount of funds to have aside for emergencies.
KJ/DB