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Financial experts often talk about the necessity of having an emergency fund. An emergency fund can help cover any expenses that arise when unexpected problems or emergencies crop up in your life. Unfortunately, the unexpected does happen. it happens much more than most people prepare for and that’s why it’s so important to have made preparations. While it’s never fun to have to actually use your emergency fund, the fact that you have one is a good indication that you have taken the steps needed to financially prepare yourself for those unexpected events. Here are a few reasons that it’s worthwhile having an emergency fund.

Job Loss

If you suddenly lose your job and you don’t have a second income to rely on, you’re going to need to find a new job as soon as possible to pay your rent or bills. If you can’t find a new job right away, an emergency fund will hopefully help cover any expenses you need to pay in the meantime. While some people differ on how much should be in your emergency fund, enough to cover three to six months of expenses is usually the agreed upon amount.

Medical Emergency

What happens if you suddenly become ill and have to go to the hospital? Or maybe you’ve been put on a new, but expensive medicine. If you have insurance, it might only cover so much before you have to pay out-of-pocket. If you don’t have insurance, the amount you’ll have to pay will be even more expensive. Having an emergency fund stored away might not help you pay for all the related expenses, but it could help you eliminate some of the bills.

Car Problems

If you own a car, especially an older one or a used one, you probably hope that it won’t suddenly break down. Car repair can be very expensive and you’ll only be frustrated by an unexpected problem that you can’t immediately pay for. After all, if your car is in dire need of repair, you won’t be able to continue driving it until it’s fixed. An emergency fund can cover the payment of any problems that unexpectedly occur.

Home Repair

Do you have a leaky roof or pipes? Or maybe your radiator or washing machine has broken. Maybe you desperately need to replace your toilet or refrigerator but have been putting it off for lack of money. Repairing or replacing these issues is usually expensive and if something starts leaking or breaks without warning, it would be nice to have money tucked away somewhere to immediately replace it. There are certain issues that need to be fixed immediately, for instance, and you don’t want to have to put those off and cause yourself further inconvenience.

Weather Disasters

Just as no one can predict an unexpected health issue or home repair issue, sometimes weather can be unpredictable. What happens if a hurricane destroys part of your home or if a flood destroys your car or apartment building? While home insurance might cover some things, you’re going to need emergency money to cover the rest of the damage and to replace your belongings.

Family Emergency

A lot of people have experienced a family emergency such as a close family member falling ill, losing their job, or coming upon hard financial times. If you’re close enough to your family and financially stable yourself, you might want to lend a hand. An emergency fund would allow you to give them financial assistance.

Moving Expenses

Have you ever applied to a job or school in a different state and wondered how you were going to pay to move? Moving can be pretty expensive and most universities and colleges don’t cover moving expenses. Unfortunately, fewer companies are offering compensation for moving as well, leaving the burden entirely on the employee. If you suddenly find yourself in the position to move to a new location, you’re going to need money to cover shipping your belongings as well as the cost of buying a new place or paying first month’s rent and a security deposit. You could save some many by looking at a moving company before hand and comparing costs between competitors.

Unexpected Events

An emergency fund is also good for events such as funerals, weddings, pregnancies, or other unplanned events that suddenly pop up in your life. Sometimes these events cost more money than you currently have in your bank account. For instance, you may need to fly across the country for a sibling’s wedding. Or you may find yourself having to scrape together money for a child. Like most unexpected events on this list, an emergency fund will allow you to dip into that bank account to cover costs you hadn’t expected to spend.

Rise in Cost of Living

Have you ever rented an apartment and been surprised by the sudden spike in rent when you renew your lease? Or maybe you’ve hated the way everything seems more expensive now that the economy is worse. A fluctuating economy might mean you’re struggling to pay bills or rent when the cost of everything else is on the rise. If you’re being accosted by the rise in the cost of living, an emergency fund will give you the ability to cover those costs until you can find a better financial alternative.

Money is Better Than Assets or Investments

Most importantly, an emergency fund is a great thing to have because cash can always be used. A lot of people depend on assets or investments to cover them in the case of an emergency, but assets and investments are not always guaranteed or readily available. An emergency fund of cash is readily available, however, and will be better suited toward helping you alleviate your current financial problem.

(Photo courtesy of Ed Yourdon)

An acquaintance came to me the other day and told me a sad story. She has been unemployed since December and unable to find work. Her husband also lost his job around the same time and although he has since found another, they went four months with no income and his new job pays considerably less than the one they lost. When you factor in her unemployment, they are now living on about 30% of what they made before. When all this happened initially, she called the bank that has her mortgage and asked for a period of forbearance. It was granted, but now that time is up and their situation has not improved and they have blown through the savings that they had. The family is now in danger of losing the house, has $40,000 in credit card debt, a loan on a second home, and two car loans. There is almost no money left to eat or buy necessities. The ship is sinking fast. (They probably could not realistically afford the life they were living prior to the job losses, but that’s another story.)

She asked me what she should do. I asked her what extras she had already cut out of her budget so I could get an idea of what might be left to cut. Imagine my surprise when she said, “We haven’t cut anything yet. I thought things would get better by now and we didn’t want to alarm the kids, so we’ve just kept things as usual.” I was floored. This is a family who is in danger of losing everything and they hadn’t changed anything about their lifestyle? What seemed like common sense to me was clearly not common sense to this woman and her family.

When you suffer a serious loss of income, whether it’s through job loss, pay reduction or disability, you need to start cutting extraneous things from your budget. Immediately. If you have a warning that you might lose a job, start cutting on the day you begin to feel uneasy. Every single day that you can reduce your spending means a little more money in the bank should the problem drag on long term. What’s the worst that can happen? You slash your budget to the bone and get a job the next day. Big deal. You can always restore things to your budget when things get better, but if you haven’t cut anything and that new job does not materialize quickly, it won’t take long to blow through any savings you have and end up in danger of losing everything.

When you lose your income, you cannot afford to live in denial. It’s painful, but you have to look at the possibility that the life you knew is gone, at least temporarily, and you have to act as though that possibility is reality. The longer you live in denial and try to keep things “normal,” the more money slips away that may be needed in the future. It may not seem like much to continue getting your hair done or going on vacations while you’re looking for work, but those dollars are dollars you might need for food and shelter three months down the road. The goal when your income drops is to get your spending down to the bare minimum and to stash as much cash as possible, not to try to keep everything the way it was before.

This woman was afraid that cutting spending and admitting that they could no longer afford vacations or toys every time they went to Target would somehow alarm the kids. Kids aren’t stupid. Even if you still take them on trips or buy them things, they pick up on the stress in the household. They hear mom and dad fighting over money. They know that mom and dad are stressed about something. Older kids especially know when something is up. And most kids, after about age six, are old enough to understand the basics of finance. They have a general idea about money, where it comes from, and what happens when there isn’t any. Worrying about alarming the kids should be the least of your worries. They already know something’s up and they are probably more able to deal with it than we give them credit for.

I recommended that she get busy cutting her budget immediately. I recommended all the things we normally talk about here on Saving Advice: Stop spending recreationally, cut out all non-necessities, renegotiate the rates on credit cards, eat at home, etc. I also told her that she needed to get busy selling anything that wasn’t nailed down and sell the vacation home. Still, she resisted. She simply didn’t want to admit that the large, fun life they had been living was now gone. I’m afraid that she will end up filing bankruptcy. The situation might be unavoidable regardless, but her inability to admit to and act on changing circumstances makes it almost inevitable. Had she been cutting from her budget since December and been selling unneeded items all along, she might have been able to spare herself at least some of the problems she now faces. She is likely facing a prolonged period of living in reduced circumstances, whereas had she acted swiftly in the beginning, she might have only faced a few months of a reduced lifestyle.

When you lose a job, and particularly in an economy like this one where new jobs are hard to come by, you have to start cutting immediately. Every cut you make early in the game buys you more time later. It isn’t fun to give up all your luxuries and it’s demoralizing to admit that you’re living in reduced circumstances. But you need to stash all the cash you can to weather what might be a prolonged period of unemployment. Ideally you’d have a large cushion already saved but if you don’t, you need to find money quickly. Every day that you wait puts you one day closer to being in this woman’s situation.

10 Reasons Everyone Needs An Emergency Fund