The importance of emergency funds
It’ll never happen to me. It’s smooth sailing as far as the eye can see.
While we all hope that our financial situation remains secure, life does have a tendency to kick up a storm every once in a while. Sometimes that might be unique to you — your company is re-organized and suddenly your career path is thrown for a loop, an unexpected medical expense crops up and it’s not covered by your insurance provider, or a family member needs help and is relying on you to be there. Other times, those stormy periods affect the entire economy and you’re caught in the downturn — the company goes under, no bonuses this year.
What’s really scary is how ill-prepared most Americans are to weather such an event. According to a survey done by Bankrate in 2017, 6 in 10 Americans don’t have savings set aside to cover an unexpected $500 expense, while the typical emergency cost is over $2,500– most often an unexpected medical expense. When asked how they would handle such an expense, those who couldn’t afford it most often responded they would use a credit card, incurring high interest debt that significantly adds to the cost over time.
You can think of how much of a hit to your income you can weather as your resiliency. If a fender bender is enough to send you over the edge, you have very low resiliency. If you can lose your job and carry on your lifestyle for 6 months without any changes while you find a new opportunity, you have high resiliency. Our goal at Farther is to help make you highly resilient.
So how much do you need to set aside?
That’s mostly a function of your expenses. At a minimum, you want to build up a cushion of three months worth of expenses before beginning to save elsewhere. To find out what your expenses are, add up what you spend on rent or mortgage, food and utilities, and any loan or other debt you need to repay. You might have more control over other expenses like travel and entertainment, but if you want to maintain your lifestyle, you should include those as well.
