3 Reasons You Need An Emergency Fund

64 percent of Americans can’t afford a $1,000 unplanned expense. Learn the reasons why it is imperative to have an emergency fund.

For most Americans, having an emergency fund seems like a pipe dream. In fact, 64 percent of Americans can’t afford a $1,000 unplanned expense. Think about how many $1,000 unplanned expenses could happen to you tomorrow. The transmission on the car could go out, your child could have a medical emergency, or you could lose your job. These may seem like rare occurrences, but you just never know when one might happen to you or your family. Although there are many reasons to have an emergency fund, here are 3 reasons to have get you started:

  1. Career transition: Did you know that right now it takes around 5 months to find a new job? This is the median, meaning half of employees can find one faster, but for the other half, it takes even longer. If you were laid off tomorrow, how long would it take you to find a new job and get started? If you are in a high demand field, this may not be a big risk for you. If you are a specialist however, it may take a long time. Add to this the chance of having to move to this new job, and the dollars really start to add up. No matter how secure you are in your job, be sure to have enough cash stashed away for the possibility of a career transition. Even jobs such as in the public sector or as a member of a union aren’t nearly as secure as they once were.
  2. Health issues: Just over 25 percent of adults will become disabled before they retire. Although this may be a short-term disability and only keep you out of the workforce for a small period of time, it could very well be a long-term issue. For American’s that have disability insurance, it may only cover long-term disabilities. This means that you would be on the hook for the first 3-6 months of living expenses until your disability insurance kicks in. If you can’t cover a $1,000 unplanned expense, how would you cover 3-6 months of loss of income? And be careful about counting on Social Security Disability insurance. They have very strict standards on who qualifies, to the point that if you can do ANY work (even being a Walmart greeter), it can be almost impossible to qualify.
  3. Family events: What happens when a family member dies, and you need to travel to their funeral? What about if you end up responsible for some of the funeral costs? What if a parent gets sick, and you need to take time off of work to care for them? All of these (and more) can happen in an instant, and you could be left scrambling to cover the costs. Reduction of income, travel expenses, and medical costs can add up quickly. Protect yourself and your family.

We have to accept that life happens, and there isn’t much we can do about it. Murphy’s Law says “anything that can go wrong, will go wrong.” Imagine if you had 3-6 months of living expenses just in case something did go wrong. How much more secure would you feel? From my experience, having an emergency fund allows you to focus on dealing with the issue as hand, instead of stressing about how you will pay for it. This can provide an immense amount of relief, security, and stability to your personal finances. Set up your bank account to automatically move money into an emergency fund, even if you can only save $25/week. You will be glad you did.

So what do you think? Have you ever experienced an emergency? Did you have the money to cover your expenses? If you had an emergency fund, how do you feel it made a difference? Be sure to share your thoughts in the comment section!

Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Follow him on Twitter @R_Alan_Moore, or contact him at alan@serenityfc.com or 414-455-5313. You can also visit his website at www.SerenityFC.com

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North Shore Newbie September 08, 2012 at 08:23 PM
While this seems like a no-brainer, I'm amazed at the number of people who are in the position to have an emergency fund but who simply don't want to do it. It's not because of a lack of resources in a lot of cases but the way they think about money. A quick example: A friend of mine has no savings, but every time I see him he has the newest phone or the latest gadget. He has a modest income but has cable TV with all the premium channels plus a few extras. When I talk to him about putting money in a 401(k) or just a simple savings account, he tells me he can't afford to do it because he has no extra cash. Almost everyone I meet who's struggling with saving money (perhaps excluding people with medical expenses) can save money if they made different decisions. In most cases it's their mindset that's the cause of the problem and not a lack of income. But how do you get someone to change their way of thinking if they don't see the need to change?
Alan Moore, MS, CFP® September 08, 2012 at 09:31 PM
North Shore Newbie, thanks for the great comment. Although there are certainly many out there that struggle to make ends meet and therefore save, there are also many that could save and simply don't. One way to combat this is to set up automatic savings. By having money come out of your pay check and into a savings account every month (similar to saving into a 401k) it helps to automate the process, and increase savings rates. Keep encouraging your friend to put away money for a rainy day, and be sure you have plenty of cash reserves as well!


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