Do You Need an Emergency Fund?

Roz Andrews
Nov 9, 2018 · 4 min read

Deutsche Version

Photo by Nattanan23 via Pixabay.com

When was the last time something unexpected happened? Maybe your car broke down when you were driving along the highway, or your toothache was so bad that you needed emergency dental treatment. Were you able to cover this cost with money from your savings?

If the answer is no, you’re not alone. Only 37 percent of Americans would be in a position to dip into their savings to pay for such an emergency, according to a survey commissioned by Bankrate.com.¹

Meanwhile, in Switzerland, just 21.7 percent of households would be able to pay for an unexpected bill of CHF 2,500 (US$2,480) within one month, according to the Swiss Federal Statistics Office.²

In the United States, 29 percent of households have less than $1,000 in savings, according to MagnifyMoney.³ People in these households would struggle to cover a substantial, unexpected expense.

The picture is similar in the UK, with the BBC reporting that 28 percent of adults have no savings at all and 40 percent have savings of less than GBP500.⁴

Inevitably, we all experience unforeseen events at unexpected times. Some of these involve paying out large sums of money, and they may arise at times when we can least afford to part with a lot of cash.

An emergency fund can help you cope with unexpected expenses without having to resort to borrowing from friends or family members, using a high-interest credit card, or taking out expensive credit options such as payday loans.

What Is an Emergency Fund?

Your grandparents may have called it “saving for a rainy day”.

An emergency fund is an amount of money that you’ve set aside to cover unexpected expenses that can arise at any time in your life. These include:

· Major car repairs

· Medical expenses not covered by insurance

· Dental bills

· Repairs to your home (if you’re a homeowner)

· Repairs or maintenance on a rental property you own

· Veterinary expenses for your pet(s).

You may also need to use your emergency fund to cover your day-to-day expenses during a period of unexpected unemployment or if you are diagnosed with an illness that means that you can’t work for weeks or months.

Who Needs an Emergency Fund?

From students to retirees, from single people to large families, every household needs an emergency fund.

However, the amount you need to save for emergencies varies according to your circumstances.

If you’re the sole wage earner and a family of three or more depends on your income alone, you’ll require a larger emergency fund than a double-income family, who could survive financially if one adult lost their job without warning.

Self-employed people with fluctuating incomes should build larger emergency funds than those who earn a regular monthly salary. If you’re self-employed, your emergency fund can be used to cover some of your essential living expenses during the months when you earn less than your outgoings.

How Do You Calculate Your Emergency Fund?

It’s generally agreed that your emergency fund should contain enough money for you and your dependents to live on for between three and eight months.

When calculating your living expenses for this purpose, include your:

· Rent or mortgage

· Utility bills

· Car payments and expenses

· Other bills or fixed expenses that you pay every month.

You may add lower amounts than you normally spend on:

· Groceries

· Clothing

· Toiletries and grooming products

· Other essential purchases.

You can eliminate some expenses altogether, such as dining in restaurants and purchasing take-out meals and drinks.

The aim is to find an amount that your household could survive on should the worst happen. An online emergency fund calculator can help you decide how much you’d need.

How to Start Your Emergency Fund Even if You Think You Can’t

If the amount you need to save seems alarming or overwhelming and you don’t already have any emergency savings, don’t panic.

Set an initial savings goal of $500 and then increase it to $1,000. It’s better to have some emergency savings than none at all.

Save the same amount regularly, if possible. If you’re paid monthly, transfer this amount into your emergency fund on pay day.

If you’re paid different amounts on an irregular basis, transfer a percentage of each payment you receive into your emergency fund.

Where Should You Keep Your Emergency Fund?

Your emergency fund should be easily accessible but separate from your checking account and long-term savings accounts for other reasons, such as a vacation, retirement or your children’s college education.

Savings accounts or money market accounts are generally the best types of accounts for your emergency fund. Look for an account that pays the highest possible interest rate but allows you to withdraw money quickly and without any penalties, whenever you need to.

Start an Emergency Fund Today

Start your emergency fund today by opening a separate account. If you can only afford to save one dollar today, deposit that into the account.

Decide how much you can afford to save each month, set up an automatic transfer, and forget about it.

It won’t be long before you have enough in your emergency fund to cover the next unexpected expense that arises.

You’ll feel more secure and confident, knowing that you have the resources to deal with the unexpected without going into debt, even if an unforeseen event does occur at a very inconvenient moment.

Dealing with the unexpected will be less stressful because you’ll have one less thing to worry about — how you’re going to pay for it.

References

https://www.bankrate.com/banking/savings/survey-how-americans-contend-with-unexpected-expenses/

² https://lenews.ch/2017/04/05/a-fifth-of-swiss-cant-cope-with-an-unexpected-expense-of-2500-francs/

³ https://www.magnifymoney.com/blog/news/average-american-savings/

https://www.bbc.co.uk/news/magazine-35801951

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