{"id":5205,"date":"2018-03-22T13:40:00","date_gmt":"2018-03-22T20:40:00","guid":{"rendered":"https:\/\/www.soundcu.com\/?p=5205"},"modified":"2023-10-30T21:34:49","modified_gmt":"2023-10-31T04:34:49","slug":"be-prepared-because-life-happens","status":"publish","type":"post","link":"https:\/\/www.soundcu.com\/blog\/be-prepared-because-life-happens\/","title":{"rendered":"Be Prepared, Because Life Happens"},"content":{"rendered":"
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An emergency fund is an essential part of your personal finances. Its importance is stressed in almost every personal finance book and budgeting blog, and yet 26% of Americans currently have no emergency fund in place. Of those who do have an emergency fund, up to two-thirds do not have the often-recommended six months\u2019 worth of expenses saved up.<\/p>\n

If an emergency fund is, in fact, so important, why doesn\u2019t it seem that way? Why do so many put off contributing to an emergency fund?<\/p>\n

The term itself could be a source of confusion. The word \u201cemergency\u201d brings to mind images of car crashes, natural disasters and terrible accidents\u2014and although these are valid examples of emergency expenses that affect people all across the country every day, they\u2019re extreme enough that it\u2019s difficult to imagine ourselves in those situations. It can be difficult to set aside a large chunk of change for emergencies when you \u201cjust don\u2019t feel that your car is going to break down today\u201d. Our wants (or discretionary spending) often feel more immediate than our need to cover hypothetical and unpredictable emergency expenses.<\/p>\n

The reality is that emergency expenses come in many forms and that there are less traumatic examples out there that would be equally good at messing up your financial situation, so it might make more sense to think of your emergency fund as a \u201clife happens\u201d fund.<\/p>\n

But, whatever name you give it, absolutely everyone needs an emergency fund in place because no one is exempt from life\u2019s surprises and obstacles\u2014and while we can\u2019t completely prevent emergency situations, we can at least limit their potential damage. An emergency fund allows you to respond immediately to financial emergencies, which allows you to handle the situation without having to deal with additional stresses like struggling to make ends meet or spiraling into a cycle of debt.<\/p>\n

If an expense is unexpected (or it results from an unexpected circumstance) and it has the ability to derail your regular cash flow, then it\u2019s an emergency expense. By that definition, a delayed insurance reimbursement is as much of an emergency expense as a meteorite landing on your car. The important part is being prepared for those expenses, no matter how mundane or how extreme they turn out to be.<\/p>\n

Let\u2019s look at what types of expense should\u2014and shouldn\u2019t\u2014be dealt with by an emergency fund.<\/p>\n

Expense Type #1: Known unknowns<\/h2>\n

\u201cKnown unknowns\u201d are situations that we can partially anticipate\u2014so this is the type of expense that should not be dealt with by an emergency fund. These situations are on our radar (known), even if we don\u2019t know exactly when they will happen (unknown). For example, if you own a vehicle, you know that at some point it will need repairs, just like you know that your home will eventually need a new furnace or that your pet will eventually need a visit to the vet.<\/p>\n

A good budgeting exercise is to make a list of all the known unknown expenses you can think of. Then compare the list to your budget and see if there are any categories you\u2019re not currently saving for. Odds are that there are probably a few areas your current budget doesn\u2019t cover, so you\u2019ll want to adjust it to include these additional categories.<\/p>\n

Expense Type #2: Unknown unknowns<\/h2>\n

\u201cUnknown unknowns\u201d, which are the types of expenses that emergency funds are truly designed for, are situations that take us completely by surprise. We don\u2019t know when they will happen, how much they\u2019ll cost or even what they will be until they\u2019ve happened. For example, a family member could suddenly fall ill and you need time away from work in order to care for them. Hopefully, you\u2019ll never experience an unknown unknown, but if you do, the knowledge that you have an emergency fund to cover additional expenses will undoubtedly help to ease a stressful situation.<\/p>\n

Expense Type #3: Underestimated known unknowns<\/h2>\n

Although your emergency fund is not intended to cover known unknowns, if one of those situations has spiraled into a bigger-than-expected expense, that is something your emergency fund would be able to cover. For example, although you have a budget for regular vet visits, you discover that your beloved pet needs surgery, which will cost $2,000. Or you might have savings to cover your car insurance deductible, but it takes three months longer than expected to receive reimbursement from the insurance company. In these situations, it makes sense to dip into your emergency fund to cover an underestimated known unknown.<\/p>\n

How much money should be in your emergency fund?<\/h2>\n

Emergency funds vary widely from person to person. The regular recommendation is six months\u2019 worth of expenses, but some prefer having nine months\u2019 or a year\u2019s worth tucked away. It\u2019s a significant amount, as it should be\u2014it\u2019s what you would be living off if you didn\u2019t have an income for an extended period of time. Whatever amount you choose, it\u2019s a hefty savings goal and it will take time to meet it, but it will make all the difference in tough times. When setting your emergency-fund savings goal, consider the following:<\/p>\n

\u2022\u00a0\u00a0 Set mini-goals:<\/strong> Saving six months\u2019 worth of expenses might sound downright impossible right now\u2014and that\u2019s a completely normal reaction. Instead of feeling overwhelmed and giving up on the idea, choose a smaller goal and then gradually increase it over time. When you\u2019re just starting out, aim for $500 in your fund; once you\u2019ve reached that goal, congratulate yourself and then set a new goal of $1,000. Once you get there, consider setting weekly or monthly contribution goals to stay on top of your savings.<\/p>\n

\u2022\u00a0\u00a0 Avoid wishful thinking:<\/strong> According to a 2014 Workopolis survey, it takes four months on average to find a new job. When planning your emergency budget, you might like to think that if you lost your job, you could turn it all around in two weeks\u2014but that could be setting yourself up for a very stressful situation. It\u2019s not fun to think about a worst-case scenario, but when it comes to emergency-fund planning, that kind of thinking can help you come up with a more realistic savings goal.<\/p>\n

\u2022\u00a0\u00a0 Imagine your lifestyle:<\/strong> If you had to quit your job in order to handle an emergency situation, what would your lifestyle look like? Would you be willing to rough it until you found a new job? Or would you need things to stay pretty much the same to stop your stress levels from skyrocketing? Consider your desired lifestyle carefully when planning your emergency fund. If maintaining your current lifestyle in times of emergency is a priority to you, you may want to save nine months\u2019 worth of income, rather than nine months\u2019 worth of expenses. But if rolling with the punches and going back to a diet of ramen noodles while you figure things out is more your style, then a smaller emergency fund would likely be able to meet your needs.<\/p>\n

Ultimately, your emergency fund is about your peace of mind. Design it to fit your specific needs.<\/p>\n<\/div>\t\t\t\t<\/div>\n\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\n\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

The important part is being prepared for those expenses, no matter how mundane or how extreme they turn out to be. Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":10,"featured_media":5206,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","_searchwp_excluded":"","footnotes":""},"categories":[50],"tags":[268,57,269,270,59,271],"class_list":["post-5205","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-life-finances","tag-be-prepared","tag-emergency","tag-life-happens","tag-rainy-day","tag-savings","tag-stuff-happens"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts\/5205","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/comments?post=5205"}],"version-history":[{"count":0,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/posts\/5205\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/media\/5206"}],"wp:attachment":[{"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/media?parent=5205"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/categories?post=5205"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.soundcu.com\/wp-json\/wp\/v2\/tags?post=5205"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}