Having an emergency savings account is paramount for life’s curve balls — but most of us are unprepared. A recent study by Bankrate indicated that most Americans cannot pay for even a $1,000 emergency with money from savings.
It won’t happen to me….
But it does happen unexpectedly. A few reasons why you’ll likely need an emergency savings stash.
- Job loss — between 2009 and 2014 20% of the workforce was laid off during the last recession.
- Auto Accident — over the course of your lifetime, statistics show you’ll get into 4 auto accidents (you may / may not be at fault). Even if its not your fault, you may not be able to work or go back to work.
- Auto Break Down – Your car needs unexpected work. My wife’s car unexpectedly had two wheels need bearings replaced urgently. This was an unexpected $800 cost!
- Health Needs — broken bones, significant disease (eg cancer)
- Home Damage / Costs — you may not have insurance for damage caused, or your deductible is high. For example water pipe breaks, flood, earthquake.
- Parent / Relative Begins to Live With You — this could be because they need help with their care, they cannot afford to live alone, etc.
Real Life Emergency Savings Needs Often >$2,500
The study further asked those who did face a financial emergency, what the needed funds were. The largest group of people said over $5,000 but even more interesting is that 58% said the costs were over $2,500 (adding the two highest groups).
Data source: bankrate.com
Loans Take Time and Should Be Avoided
Getting money from a loan takes time usually. While a credit card would charge you 20% or more in interest — causing you additional financial constraint. We do not recommend using credit card with revolving interest. Also, you will have to pay back a loan with regular payments. Will you be able to repay the loan (with interest).
An emergency fund has the money immediately available — you’ve been planning for this just in case.
The Emergency Funds Solution Is Simple
Start putting money away for a rainy day emergency. Create a goal for a rainy day fund. Maybe $1,000 at first or $2,500 … though eventually the emergency savings fund should be able to meet your financial needs for 3-6 months. Starting at what you can afford in your budget, even if its $25/month. See some additional detail about this in our post on emergency savings.
Its best to have funds socked away for a rainy day. You never know. See our other posts about saving money.
Do you have any experiences regarding emergency or rainy day savings?