One of the few certainties in life is that unexpected events are bound to occur, and it’s critical that you’re not caught off guard when they do. In this respect, having an emergency fund is imperative so that you don’t spiral into crippling debt when unanticipated situations happen. Nearly one third of Americans don’t have a penny in savings, which is an extremely dangerous position to be in if you’re facing something like an abrupt job loss, steep medical bills, or emergency home repairs.
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What Exactly Is An Emergency Fund?
An emergency fund is simply money that you’ve allocated for when life throws you a curve ball. Financial advisors recommend that you should calculate a total of your monthly expenses, and make sure that your emergency fund can hold you over for at least three months. Given its purpose, it’s important that the money is set aside in a place where it’s easily accessible when you need it—so invest your emergency fund in a way that’s retrievable, like in a savings account.
Cash vs. Credit
Since an emergency fund needs to be accessible, having a credit line is not enough. It needs to consist of cash that could be used on a moment’s notice as a defense against going into debt.
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Common Scenarios For An Emergency Fund
There are many situations in life where having savings can be a lifesaver, protecting you from going deep into irrecoverable debt. Here are five of the most common scenarios:
- Job Loss: You might suddenly lose your job—even if your job performance has been stellar—and an emergency fund can pay the bills until you land your next position.
- Medical Bills: In the event of a spontaneous illness, you may find yourself with exorbitant doctor bills that aren’t covered by insurance.
- Home Repairs: One day everything in your house could be functioning smoothly—and the next day part of your roof caves in and your insurance won’t cover it. An emergency fund will help you cover these expenses.
- Unanticipated Taxes: This is another area in life where bills can be much larger than expected, even if you keep a close eye on your earnings.
- Family Emergency: An illness or death in the family can result in you needing to fly across the country unexpectedly, and you need to be prepared for this type of situation.
Saving vs. Paying Off Debt
A major financial dilemma that Americans face is whether to use their money to pay off debt or to start saving for an emergency fund, and there are advantages and disadvantages to each side. For most individuals, finding the optimal middle ground is the best option, so that you can save money even while climbing out of debt. However, this isn’t always possible and the perfect formula depends on your particular circumstances.
Pro Tip: Calculate your monthly budget and design a plan that will help your emergency fund get off the ground sooner than later. The earlier you start saving, the more prepared you’ll be if disaster strikes.
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