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You need an emergency fund. A recent study showed that a majority of Americans, 57 percent in fact, cannot handle an unexpected $500 expense. That’s a pretty sobering statistic.
This means that nearly 3 in 5 Americans lack a savings account with at least $500 in it. If you’ve already saved this much, you’re actually ahead of the masses.
Keep in mind that the median household income is about $53,000 and the 60th percentile for income is around$66,500. This means that people who earn more than $60,000 quite possibly have less than $500 easily accessible for an emergency.
Reason #1 Why You Need an Emergency Fund
An emergency fund can take care of unexpected expenses.
Unexpected expenses happen. No one really likes a busted radiator or a leaky pipe. However, these problems are likely to happen at some point in our lives. If you’ve not had one of these issues arise yet, you’re likely to experience them in the near future.
The problem with unexpected expenses is the fact that they’re…well…unexpected. You can’t figure on your sewer pipe collapsing today. It’s actually happened to me, and since it was outside the walls of my house, insurance didn’t take care of most of the expense. Had I not had some money stashed away, this could have been an even bigger problem.
If you have an emergency fund, you’ll be more likely to be able to handle these problems when they arise. Many financial experts, like Dave Ramsey recommend that you start with an emergency fund of $500 to $1,000.
Reason #2 Why You Need An Emergency Fund
An emergency fund can keep you out of debt.
I hate debt. Unfortunately, I’ve been in debt to some degree or another for a while. Of course, most of this is related to purchasing a house. I don’t want to go into debt for everyday purchases like food.
When the radiator busts, you need to fix it or have your car blow up. You probably need a car to get to work. You also need to eat. The physical necessity of food does not go away just because your refrigerator decides to die.
If you have $500 or $1,000 saved up for emergencies, you don’t have to go into debt to get a serviceable refrigerator or fix a radiator while also eating. Which logically brings us to the third reason why you need an emergency fund.
Reason #3 Why You Need An Emergency Fund
An emergency fund can minimize stress.
Have you been in a situation where you had a financial need and a lack of cash to pay for it? I know I have. This typically leads to debt. If you look up to reason #2 above, you’ll see that I HATE debt. I want it gone.
If I can easily take care of a $500 or $1,000 expense with some funds that I’ve set aside t o deal with the unexpected, I’ll probably have less stress in my life. The reasons for this are related to the stress that financial catastrophes bring.
People who are living paycheck-to-paycheck are more likely to have marital problems. They are more likely to have short tempers with their kids.
If you have an emergency fund built up, the little unexpected expense can roll off you like water off a duck’s back.
Reason #4 Why You Need An Emergency Fund
An emergency fund can help you through a job loss.
The fourth reason why you need an emergency fund is the fact that it can help you through a job loss. Dave Ramsey calls the $1,000 emergency fund a baby emergency fund.
After you’ve built up the $1,000 emergency fund, most financial gurus recommend that you save up between 3 and 6 months of expenses. Why? Job losses happen, and they’re one of the biggest financial catastrophes that most people can experience.
Usually, some unemployment insurance will kick in, but it will be far from enough to meet your expenses in most instances. This is where the 3- or 6-month e-fund can bridge the gap between jobs, which will help with reason 3 above–cutting down on stress!
I would point out that there is an outlier when it comes to amount you need. Suze Orman actually recommends having 8 months of expenses squirreled away in an emergency fund. Regardless of whether you stick with 3 months or 6 months or 8 months, if you have a nice emergency fund set up and you lose your job, you’ll be happy to have the money!
Reason #5 Why You Need An Emergency Fund
An emergency fund can help you build up financial confidence!
I can remember the first time I went golfing. Hitting the links used to be one of my favorite hobbies. Today, I rarely play, but the first time I went to hit the ball, I completely missed it! When I finally hit the ball, I actually hit what is referred to as a worm burner. The ball scooted a few yards along the ground before settling in the rough. Not good.
On that first time out, however, I was able to hit one really good shot. It was enough to get me to come back. I played quite a bit in college and into my mid-20s, and I got pretty good and got to where I could usually beat all of my friends. I even broke into the 70s for a couple of rounds.
So…I say that to say this–a little bit of success can usually lead to enough confidence to lead to bigger successes. Once you’ve saved up $500 for an emergency, you now know how to succeed on a small level.
You can then use that knowledge to build up the next $500 in savings. You can then build up to a month, then two, and so on. If you never get started saving toward an emergency fund, you may never build the discipline and the confidence to achieve financial success, much less financial freedom.
If You’re Ready To Start An Emergency Fund
Looking to start an emergency fund? It’s probably a good idea to start a budget (AKA a spending plan). It’s also a good idea to start looking for additional ways to make some money.
If you’re looking to build up some additional income, you might want to check out these ways to make money online without spending a penny. Even $20 a month could add up to nearly $250 a year. This could go a long way toward building your up your e-fund.
Do you have any other reasons why you might want an emergency fund? Let me know in the comments!
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