If the ongoing COVID-19 pandemic has shown us anything, it’s that life can be unpredictable. That makes it more critical than ever to have a financial plan – one that includes an easily accessible emergency fund. Whether you have already experienced a loss of income or want to be prepared should you encounter job loss or unforeseen expenses, an emergency fund is an important part of the financial planning process.
Step one to building a secure financial future starts with a savings account!
To clarify, an emergency fund isn’t filled with ready-to-spend cash for when you find a great deal or feel like splurging on a weekend getaway. It’s money you’ve planned to set aside for emergencies only.
No matter your circumstance, discipline and planning are vital to creating an emergency fund. Whether you can start today, tomorrow, or in the near future, here are four reasons it’s important to have an emergency fund:
A savings account with several months of living expenses can help to pay for necessities while you search for another job and apply for unemployment benefits.
2. Manage medical emergencies
Many of us enjoy employer-sponsored insurance; with job loss comes the loss of healthcare. The Kaiser Family Foundation estimates that, in no small part due to Coronavirus-related economic conditions, 27 million people could potentially lose their employer-sponsored insurance and become uninsured following job loss.
Across our country, medical issues are going unchecked because Americans just can’t afford to pay the bills. Medical care has become much less affordable – according to healthcare.gov, the average cost of a three-day hospital stay in 2019 was around $30,000. Having an emergency fund as part of your financial plan can help you and your family cover a potential medical emergency.
3. Handle major household repairs
When it comes to emergencies, we’re talking “must-fixes”, not cosmetic upgrades that will make your home (or car) sparkle and shine. Here are a few examples of potentially essential repairs from HomeAdvisor.com’s True Cost Report:
Unclogging a drain: $194
Fixing a faulty A/C unit: $318
Repairing a water heater: $480
Repairing a roof: $653
Home repairs can be expensive, so having an emergency fund can help alleviate stress should the unexpected happen. Just make sure you don’t tap your emergency fund for anything that’s not essential to basic living.
4. Build for the future
If you’re already saving money, that’s fantastic. Now, set aside a small amount into a separate savings account, too. Presto! You’ve just created an emergency fund!
We recommend having an emergency fund that’s three times your monthly expenses. That may seem like an insurmountable sum at first, but you can get there. Start small, and you’ll be able to check off significant achievements in a hurry.
Create a budget (or remake your current one) that includes emergency savings. It’s okay to start small – begin with a goal to save $500 or $1,000.
Open an interest-earning checking or money market account, then make saving automatic by having a predetermined amount deposited every time you get paid. That way, you are less likely to feel the “emotional pain” of transferring money – and after a few months, you might not even realize it’s been transferred.
Trim unnecessary expenses until your emergency fund is complete. That may mean pausing installation of new countertops or a backyard pool, or it might mean taking smaller steps, like eating out one less time per week and putting what you would have spent into your emergency fund. Either way, you’re investing in your future.
Don’t spend your emergency fund unless it’s for emergencies – even if you “plan” to put the money back. Emergencies and plans often don’t line up.
Once you’ve hit your emergency savings goal, increase it again! Aim for $500 or $1,000 first, then build until you have three months’ worth of expenses saved. You can do this (and you’ll thank yourself later!).
Need help? Partner with a credit union like 1st United to build the emergency funds you need to thrive. We can offer suggestions on different ways to make savings easy, such as automating it. Send us an email or call us at (800) 649-0193 to let us know how we can help you take your first – or next – step on your journey to better financial health.
We understand that many people have been affected by job loss due to COVID-19 economic conditions and have been forced to make some hard budgeting decisions, including depleting their emergency savings. If that’s the case, we’re here to help – please let us know how we can be of assistance.