Murphy’s Law states that if anything can go wrong, it will go wrong sooner or later. If you are not prepared for the challenges that life throws at you from time to time (and unexpectedly!), then you could find yourself in a really tight spot. This is why it is important to have an emergency fund at all times. The last thing you want to do is be forced to rely on high interest short term loans or your credit cards when you’re in a bind. An emergency fund allows you to meet unexpected financial challenges and keeps you from getting into debt when you need a bit of extra cash.
Here are some good reasons to build an emergency fund:
- To cover unexpected medical expenses: You never know when you or anyone in your family will fall ill, get injured or get into a car accident. When any such mishap happens, you will need money immediately to cover the expense. Even if you have health insurance, you may still need money for treatments and medication which may not be fully covered.
- To cover unexpected travel expenses: Think of this situation. Your mother lives in another city 400 miles away and you get the news that she’s suddenly had to be admitted to the hospital. What will you do? You will either have to ask a friend or take out a loan on a high interest rate to get this cash quick so you can make the trip.
- To cover your living expenses: What happens if you suddenly lose your job? The money will stop flowing in and you will have to cover your day to day expenses using your savings until you can find another job. Ideally, your emergency fund will be enough to sustain you for at least 3-6 months while you search for employment.
- To pay for car repairs: Like all machines, your car doesn’t make an announcement before it breaks down! Something is always bound to go wrong or require maintenance at least once a year. If you have no money to repair or replace the defective parts, then you will either have to take out an expensive loan or learn to survive without your car.
- To pay for home repairs: Your home may not have as many moving parts as your car, but it is vulnerable to the forces of nature. The doors and windows can become damaged, the walls can crack, the ceiling can leak and the roof can fall. These are all emergency repairs that you cannot plan. But you can plan financially – make sure you have a fund set aside for unexpected repairs.
Your emergency fund should be kept in a separate bank account that you will not touch unless there is an actual emergency. If it’s too accessible, you may be tempted to dip into your emergency fund the next time something catches your eye. Commit to using your fund only for true emergencies.
Not sure how to start saving for an emergency fund? The credit counsellors at CCSAC can help you work an emergency fund into your household budget so you can prepare yourself for life’s unexpected expenses.