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Actions Why Do I Need an Emergency Fund?
Key Takeaways
- Many families are unprepared for a minor financial emergency.
- Setting money aside for unexpected expenses can keep you out of debt.
- Creating a habit of saving can have lifelong financial benefits.
When the government shut down for 35 days in January 2019, millions of federal workers and contractors, and their families, found themselves scrambling to make ends meet. Nearly half fell behind on their bills, and more than a quarter missed a mortgage or rent payment, according to a Prudential survey of those who went unpaid during the shutdown.
“The recent government shutdown is a wake-up call for Americans and proves how vulnerable people are to income volatility," said Jamie Kalamarides, president of Prudential Group Insurance. “Our survey puts a spotlight on both the need for emergency savings and forms of insurance available at the workplace, like disability insurance, which can help Americans protect their income when unexpected events arise."
Every family in America should have an emergency fund to handle unforeseen events. Here are three important reasons why:
You never know when you'll need it
Life is full of unexpected events, and it's impossible to know when they'll hit (just that they will, eventually). Just as government workers couldn't have predicted they'd go a full month without receiving a paycheck, you never know when your car is going to break down, or a roof will spring a leak.
Having the cash on hand to deal quickly with such events can prevent the financial burden from compounding. If you have enough money to pay for car repairs or cover a rental car while yours is in the shop, for example, you don't have to also worry about missing work because you can't get there. If you have the cash to pay your utilities while you're out of work recovering from surgery, you don't have to worry about having your water shut off. Even one missed mortgage payment can lead to a lower credit score, which can make it harder or more expensive to borrow money in the future.
An emergency fund allows you to plan for any of those events, even if you don't know when they're going to happen. Ultimately, you should aim to set aside three to six months' worth of expenses in an account that you can quickly access when needed.
Having an emergency fund will reduce your stress
Emergencies, by their nature, are nerve-wracking, whether you're dealing with a medical crisis or a job layoff. More than 80% of those affected by the government shutdown said their overall stress levels spiked, with half reporting that they became much more stressed.
While emergencies and disasters can feel emotionally overwhelming, knowing that you've got a financial safety net in place can reduce those effects.
You can avoid financial pitfalls
Without an emergency fund, those in crisis might have to make money moves that have long-term consequences. Withdrawing money from your retirement account, for example, or using high-interest credit cards can throw your entire financial plan off course.
More than four in 10 federal workers borrowed money to help meet their financial obligations and day-to-day expenses during the shutdown. Having an emergency fund gives you money to cover your ongoing bills in the short-term without having to take on additional debt. That way, once the emergency has passed, you can focus on rebuilding your emergency fund, rather than dealing with new creditors.
An emergency fund forces you to live below your means
Spending less money than you make is one of the basic rules of personal finance, but it's hard to do when you're used to living paycheck-to-paycheck. By committing to saving an emergency fund, you'll get into the habit of setting aside a portion of your income on a regular basis and eventually, you'll be used to living your life without that money. Once you've funded your emergency savings, you can comfortably redirect that portion of your income toward other financial goals.
What you can do next
Begin building up your emergency fund by setting up a regular, automatic deposit into a designated account. While you should aim for three to six months' worth of expenses, even a small amount of cash set aside for the unexpected can help.
DID YOU KNOW? You can start building your emergency fund with an investment account from LINK by Prudential! All you need is $100.
Simply log into LINK by Prudential Opens in new window to create your profile, set and prioritize your goals, and choose from solutions that you can purchase online or over the phone. Get started today!
Beth Braverman is a freelance writer covering personal finance, parenting, and careers. Her work has appeared in dozens of publications, including Consumer Reports, CNBC.com, and CNNMoney.com. She lives with her family in Westchester County, N.Y.
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