Emergency funds may not be the most exciting topic in personal finance, but it is one of the most crucial if you want to avoid unnecessary debt. The main reason financial planners give for creating an emergency fund is to pay for the necessities in case of a job loss.
However, don’t let a stable job keep you from creating or maintaining your emergency fund. Check out these reasons to have an emergency fund beyond paying for necessities after the loss of a job.
Even with health insurance, medical emergencies can be incredibly expensive. From the basic cost of missing days of work to co-pays and uncovered medical expenses, an unexpected illness or injury can cost thousands and you don’t want those expenses on your credit card.
Vehicle maintenance is another costly thing to run into unexpectedly. A trashed transmission or a wreck can easily cost hundreds or thousands of dollars that tight budgets can’t afford to cover. An emergency fund will cushion the blow so you don’t get stuck relying on a credit card with high interest.
With the hurricane on the east cost fresh in your mind, natural disasters are an obvious use of an emergency fund. Homeowners insurance may cover much of the most expensive damage, but an emergency fund to cover everything else. Although sometimes expenses may be waived, as in the case of Citibank and Chase after Superstorm Sandy, not every bill is so lucky.
Homeowners know that unexpected costs are part of the deal. However, a burst pipe, broken appliance or faulty air conditioner doesn’t have to leave you in debt if you have the forethought to build a strong emergency fund.
To avoid taking out a loan with high interest, some may advocate borrowing from a retirement fund. However, borrowing against your future like this will cost you in two big ways. Not only will you have less in your retirement fund, you’ll pay a hefty tax for tapping into that money before age 60. Contribute to your emergency fund so you don’t have to make the tough decision to withdraw from your retirement.
For more information on the ins and outs of emergency funds, check out our weekly roundup on other personal finance topics.