If you budget, follow Dave Ramsey, or know anything about money, you’ve probably heard of an emergency fund. Sadly, it seems like a lot of people are totally unprepared for emergency situations, and are one catastrophe away from potentially going bankrupt.
I’m breaking up this post into two parts: today I explain what an emergency fund is and why you need one, and next week I’ll get into how to set one up and ways to fund it.
So the concept of an emergency fund is simple- it covers the cost of any emergency that comes up. What constitutes an emergency? Here’s just a small list:
- Job loss
- Hospital visit
- Broken-down car
- House repairs (Heating and A/C, plumbing, appliances)
Here’s what an emergency is NOT:
- Store sales
- Christmas gifts
- “Upgrading” furniture
We’ve had to use our emergency fund many times to help us get through a rough patch, and we’ve always been thankful to have it available. Because of it, we’ve been able to stay out of debt since the day we got married (besides the house payment) and we can live with a sense of peace knowing that if something should happen, we’re prepared financially.
If you still need to know why you need an emergency fund, here are three real-life examples, two of which happened in the same year.
Your job could be lost at any time- and the bills still need to be paid.
You think it’ll never happen to you. But it does. My husband suddenly lost his job back in March; it was completely unexpected, but then again, it usually is. We could have been in a world of hurt, especially because I don’t work outside the home, but because we had an emergency fund, we knew we could survive for quite awhile until either the money ran out, or he found a new job.
Your appliances will break at the most inconvenient times.
Luckily, John got a new job 4 months later. And, because bad things always come with the good, our washer completely broke a month after that. We were able to use our emergency fund to fully pay for a new and better washer.
It feels amazing to say that; we didn’t have to go into debt! Our first washer was bought on Craigslist for less than $100, so it was already well-loved, and getting loud and clunky. We could have gone the same route, but decided it was better to just get a brand new one. And we had the money, so we made it work.
Your car will suddenly need immediate work.
If your car needed all 4 tires replaced, would you have the money to pay for it all at once? Does it terrify you to even think about it?
John had a flat tire in his car and had to get a brand new one because that kind of tire wasn’t made anymore. His other three tires were pretty worn down, and because we had money stashed away for something like this, it was no problem for him to just get the other three replaced, too.
I hope I haven’t totally scared you, but it’s even scarier to be in a situation where you have no money and everything seems to be going wrong.
Need to hear more? Read: How to Set Up an Emergency Fund (And 6 Ways to Fill it!)