What An Emergency Fund is Actually For

by Dominic Ortiz | December 22, 2017 5:35 pm

A emergency fund is money you have put aside for when a situation you are not expecting happens. In the event of a tragedy, you’ll have some peace of mind knowing that you have money saved for the specific reason.

The idea is to save up to six months or so[1] of your salary to help you handle anything unexpected. You don’t have to save it all at once–find the best way that works for you and stick with it.

By having this money saved up, you can avoid racking up your credit card bills, or borrowing money and creating debt. The trick is to only use this money in case of an emergency–here are the scenarios when it’s acceptable to use:

Unanticipated Lay Off or Job Loss

Nobody likes being laid off from a job, but people do have to deal with job loss from time to time. Using your emergency fund will be beneficial for you in this situation–it can be one less thing you have to worry about when you’re trying to get yourself back on your feet[2].

The money can be used for paying your bills when you are no longer having recurring paychecks coming in. It might take longer than you initially thought to find a new job, so saving up as much as you can before is the smartest thing to do.

Major Health Expenses

Another good reason to build up an emergency fund is to help you take care of your medical expenses. Although, your health insurance plan can help you take care of some of your medical expenses–it isn’t always enough. If you get hurt on the job, be sure to look into worker’s compensation[3], and see what benefits you are eligible for.

If you’re in a serious health situation that requires major surgery, your insurance probably won’t cover[4] the entire cost. This is when your emergency fund helps out.

Medical debt is the number one reason people file for bankruptcy, and you will spend a long time repairing your credit[5] if you are not prepared.

Sudden Dentist Visits

Having a dental issue can be an extremely painful situation. The last thing you want to deal with is not being able to afford your needed treatment. Even if you have dental insurance, it doesn’t mean you won’t have additional costs now and then.

You could end up undergoing procedures that are not commonly covered such as: dental implants if you lose a tooth, or need to surgically remove a tooth that was impacted. If you don’t have dental insurance at all, your emergency fund will help tremendously.

Car Repairs

Most people rely on their cars as their only way of transportation to work, school, or anywhere else they need to go. Your emergency fund will help you pay for a new transmission or when you need new tires.

Even when you have car insurance, you’re still required to pay for deductibles in cases involving car accidents and regular auto repairs. In the worst case scenario, you need to make a decision if your car is worth repairing[6] or if you should consider buying a new one.

No matter what, car maintenance is bound to come up in your future and you will be forced to make quick decision. You will be grateful you have the money to make such a costly choice without dipping into your other accounts.

Home Repairs

Although home insurance can cover some of your home expenses–some do come with high deductibles. If you suddenly have a leaking roof or your washing machine breaks, you want to fix the problem as quickly as possible.

Even if you don’t have a ton of money saved up, whatever you have will at least be able to cover some of the cost. Dealing with your insurance company may be a long process when you need the repairs done quickly. You won’t have time to scramble around and think of what you should do–the solution is to use your emergency money.

High Tax Bills

If you end up with an unanticipated tax bill[7]–you don’t want to owe the IRS money. The last thing you want is to end up with such a low bank balance, or worse, file for bankruptcy.

Using all of your money to pay for this bill could leave you completely broke and living paycheck to paycheck. It could take you a long time to build your bank account back up, so use the extra money you have wisely.

Unexpected Travel

With your emergency fund, you can easily deal with the costs of traveling if a loved one dies unexpectedly, or you need to travel for another important reason. If you are traveling and contributing to the cost of a funeral, you can use your emergency fund and not have to worry about the expenses. This leaves you prepared for this type of situation so you can focus on your family rather than the money or being in debt afterwards.

The Bottom Line

Having an additional savings account seems ideal in a perfect world, but it can be hard to save an excessive amount of money without using it on something other than an emergency. However, you can try and make this process as easy as possible.

To help you save regularly, you could open an online savings account[8] and set up automatic transfer from your paycheck or checking account. It doesn’t have to be a huge amount all at once, you can save a little at a time–and eventually you will have enough money saved up for a time when you really need it.

Endnotes:
  1. save up to six months or so: https://www.cnbc.com/2017/06/14/suze-ormans-explains-how-much-money-to-keep-in-your-emergency-fund.html
  2. get yourself back on your feet: https://www.cnbc.com/2017/08/24/what-to-do-when-youre-laid-off.html
  3. worker’s compensation: https://www.pondlehocky.com/practice-areas/workers-compensation/
  4. probably won’t cover: https://www.huffingtonpost.com/entry/surprise-medical-bills-insurance-coverage_us_56e30a05e4b0b25c9181d1ec
  5. repairing your credit: http://www.leinartlaw.com/debt-guides/credit-repair/
  6. if your car is worth repairing: https://www.daveramsey.com/blog/should-i-repair-or-replace-my-car
  7. unanticipated tax bill: https://www.washingtonpost.com/news/get-there/wp/2017/04/05/8-reasons-why-you-could-end-up-with-a-surprise-tax-bill-this-year/?utm_term=.298f38b85754
  8. online savings account: https://www.discover.com/online-banking/savings-account/

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