You might be thinking, I don’t really need an emergency fund. Here’s why we think you should reconsider. To begin, in case you don’t know what an emergency fund is, you should start here.
You might understand how having an emergency fund might be useful, yet still not see yourself as needing one. In order to convince you otherwise, we’re going to use a fictional but certainly relateable and realistic story to get the point accross.
Meet Sara, she’s pretty confident about her finances and makes enough to get by just fine. She’s had a stable job making her $40,000/year for the past couple of years. She rents a place just outside of town from her job and she makes payments on a car that she relies on to get her there and back. She doesn’t spend money uncontrollably, but she has a lot of expenses that have added up over the year. Let’s take a look at her budget:
|Monthly income after taxes||$2300|
|Cable + Internet + Utilities||-$200|
|Entertainment + Eating Out||-$280|
Sara isn’t left with anything by the end of the month, so she hasn’t been saving money despite the fact that she’s definitely getting by. The problem here is that getting by doesn’t prepare you for unexpected and costly events. Here are some unfortunate but not unlikely events that could happen to Sara:
Her car suddenly needs repair, and it’s going to cost $800
Since she doesn’t have enough cash on hand to fix the car but she desperately needs it to get to work, Sara decides that she’s going to put the bill on her credit card. This is a bad idea because credit cards often have high variable interest rates from 16%-30%, making it easy to accumulate debt fast if you don’t pay them off completely every month. Given that Sara hasn’t been able to save any money, she reaches for her credit card, putting herself further into debt.
She gets laid off
This isn’t an unlikely scenario and one that everyone should be prepared for in today’s economy. Suddenly Sara is left with no income and no savings. She’s got a month to find another job before bills that she won’t be able to pay start coming in. She thinks about selling her car to scrape by, but if she does that it’ll be harder for her to get around town for her job interviews, if she can even get an interview that quickly. Instead she decides that she’ll have to put her expenses on a credit card until she can find another job.
Thankfully she eventually finds another job 2 months later, but now she has 2 months worth of credit card debt that’s been piling up. When her first paycheck comes, she first has to take care of the current month’s expenses, then pay a small amount towards the debt she’s racked up for the last 2 months, which is quickly growing.
An example of how Sara could have saved for an emergency fund
Sara had been at her first job for 2 years, spending ~$280 on going out with friends. If she had have saved $100 of that every month for emergencies, she would have had $2,400 saved up. It’s easy to see how that would be useful in both of the situations outlined above. That stressful $800 car repair would have only been an inconvenience. If she was laid off her emergency fund would have paid for 2 months of rent and utilities, meaning she could put less on her credit card.
The two examples above happen to people all the time, and those are only the most obvious and common ones. Other potential emergencies or unexpected expesnes involve traffic tickets, medical bills, replacing appliances, getting evicted, and natural disasters. Even if you think your job is secure, you’re healthy, and your car is in immaculate condition- having an emergency fund at the very least gives you peace of mind when you go to sleep at night.