Years ago, while driving home from college, my car broke down in a toll booth. I naturally panicked. Not a lot of embarrassment – but a fear of how much it would cost me to tow and fix it.
Most of us don’t like to spend money on such things. It’s even worse, when you don’t have the money in the bank to take care of such an unexpected surprise. From that point on, I made sure to get a file emergency fund in standby mode.
As the name suggests, this is simply a savings account that you only use when you have to pay large and unexpected expenses. Ideally, you should have saved to cover 3-6 months of basic expenses. To get started, though, save at least $1,000 so you don’t put yourself in huge debt.
But, what exactly constitutes a financial emergency? Well, buying a shiny new iPhone or setting off to the Caribbean doesn’t matter. Instead, the following seven examples will be.
1. cash flow draining
Without a doubt, losing a primary source of income is a financial emergency. In fact, this is probably the main reason why you should stash an emergency fund. Even worse, sometimes this can seemingly come out of nowhere.
Regardless of whether you’re a freelancer who lost a client or recently received two weeks’ notice, this can have immediate consequences, including:
- The most obvious repercussions is that you no longer have a source of income. In addition to causing stress, this means that you can no longer pay your expenses, which can damage your credit score for closing facilities. If you use credit cards to stay afloat, it will drive you into debt. Even if you can get your severance or unemployment benefit, this will still only be a percentage of your previous salary.
- Did you receive benefits such as health insurance or retirement contributions from your previous employer? If this is the case, and you lose your position, you may have to stop funding your plan for the time being or pay out-of-pocket medical costs.
- It may take several months to find a job similar in pay to your previous salary. If you have nothing set aside, you will continue to struggle to keep up with your expenses.
- Physical and emotional health will also suffer as you may experience feelings of failure and hopelessness. This in turn causes financial stress, strain on your relationships, and engage in unhealthy habits such as poor diet or substance abuse.
2. Medical or dental emergency
Even if you’re lucky enough to keep your primary source of income, you know when you’ll have to deal with a medical or dental emergency. For example, you may have to be hospitalized due to a sudden illness or accident. This visit to the emergency room could be a mortgage payment or a car note.
What if you have insurance? You can still be responsible for a co-pay, which averages $250. “However, with the rise of high-deductible health plans in recent years, even insured people may have to pay the bill in full if they do not meet the plan’s annual deductible,” explains Janet Hunt in balance.
“These deductions must meet the 2020 IRS minimum of $1,400 for an individual, or $2,800 for a family to be considered under HDHP,” Hill adds. “The discount can be higher depending on your plan.”
And things can be even more worrying if you’re a pet owner. An emergency visit to the vet can range from $250 to $8000!
3. Home / Car Maintenance and Repair
“Homebuyers rarely think about the cost of owning, operating and maintaining a home,” said Ellis Glink, author of “100 Questions Every First-Time Homebuyer Should Ask” and publisher of ThinkGlink.com. explore. “They are very interested in looking at the cost of the mortgage, taxes, and insurance. If a home buyer is on the verge of affordability, buying a larger home with higher upkeep and upkeep could push him or her over the edge financially.”
Want to avoid such a scenario? Then you need an emergency fund to not only keep your home safe and in good shape, but also unexpected expenses.
Other examples could be a natural disaster that damages your home or a pipe burst in your bathroom.
How much should you have saved for home repairs? “According to the one-percent rule, you should set aside at least one percent of your home’s value each year for home maintenance,” the Discover team recommends. “For a $360,000 home, that’s $3,600 a year or $300 a month.”
- How do you determine how much emergency savings you need on hand?
Another good rule of thumb is to “save 10 percent of the total cost of property taxes, mortgage, and insurance payments,” says Glink. “This is probably the minimum amount you should plan.”
If you own a car, the same concept should apply. In addition to keeping your car in good condition, you want to be able to pay any potential quick expenses. AAA He suggests setting aside at least $50 per month for routine maintenance and repairs.
4. Unexpected travel
What if a loved one gets sick or falls ill suddenly? Perhaps you do not have enough time to compare travel or accommodation expenses. You also don’t have the luxury of waiting until you discover a better deal.
Alternatively, you will likely have a last minute plane ticket at a hefty price because you have no other choice. Even if you find a great deal, it’s still a cost you haven’t calculated.
- What is unexpected travel?
In addition, you may have to extend your travel due to factors beyond your control. For example, a 24-hour blizzard or bug might force you to book your accommodation arrangements for another day or two. You may also have to buy a new plane ticket.
One of my friends had to deal with this kind of scenario while attending a wedding. They were unable to make their flight, which required them to book another night at their hotel and then book a new one. They did not have the funds for these additional expenses, and he had to borrow money from his parents.
5. A tax bill that is larger than expected
The last person you want to owe to is old Uncle Sam at Google. But, this debt can sometimes happen. In fact, many Americans who received a refund the previous year were shocked to learn the following year that you owed government money.
In 2019, this was popular for some people like Andy Kraft and Amy Elias from Portland, Oregon. The couple used to get a small refund. But in 2019, they owed $10,160.
“I will never forget this moment; I thought, ‘We look good,’ and then we added in the next W-2 and my jaw hit the ground,” Kraft said. CNBC. “There was no way I wanted to believe that what I was looking for was accurate.”
Before you have a panic attack, realize that there Ways to deal with unexpected tax bills. For starters, apply on time and pay what you can to avoid fees and penalties. You may also be able to request an extension or set up a payment plan.
If those aren’t options, you can tap into your emergency savings. With your emergency savings, you won’t have to take out a loan, borrow money from family, friends, or even a 401(k).
6. Surprising moves
Several years ago, in the middle of a very cold winter, the heater in my house went out. Unfortunately, the repair would have taken two days. I couldn’t stay where I was, so I had to check into a hotel room for a few days.
For me, this was a double whammy. In addition to the $800 repair pair, I also walked away with $300 for the hotel. Fortunately, I had enough savings for the heater. But, I had no cash for the hotel and had to, reluctantly, use my credit card.
Another example of a windfall is if your company is relocating to a new building or accepting a new position in a new state. Although not as last minute as my heater experience, this may happen faster than you can save up for any moving expenses.
Your employer may cover some of these expenses. But don’t count on them to pay for everything.
7. Funeral costs
While it’s definitely a dirty topic, we also know it’s inevitable. Furthermore, funerals can range anywhere between $1,500 and $15,000. I remember when a friend lost her father and was shocked at the cost of the funeral and how her family was quick to pay for it.
What if they have life insurance? You will get compensation. But, it could take months before that happens.
Creating an emergency fund ensures that you are prepared for whatever life throws your way. Best of all, it doesn’t take much to get started. If you put in $100 a month, you’ll have $1,200 in a year – and that can make all the difference in the world to your budget.
More than that – you’ll feel more secure and make a huge difference to your mental health.
If you must withdraw from your emergency fund, be sure to replenish it as soon as possible.
Written by Peter Daizem
The Epoch Times Copyright © 2022 The opinions and opinions expressed are those of the authors. It is intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. Epoch Times does not provide investment, tax, legal, financial, estate, or other personal financial advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.