Do you need an emergency fund? 6 reasons you do
An emergency fund is like building cardio in your exercise routine. It strengthens your daily financial wellness (like your heart and lungs), increases your long-term financial health (similar to your metabolism) and can lead to a longer, more financially fit life.
Without an emergency fund, you may have to rely on credit cards, a loan or tap into retirement savings. That approach can leave you with overwhelming debt at high interest rates and inadequate retirement accounts—plus plenty of anxiety.
So consider these six reasons from Alerus experts on why to start and build your emergency fund.
You need a working car to get to work, and sudden car repairs or a breakdown away from home can add up quickly. Insurance covers some expenses, but you’ll still need cash to cover your deductible.
Here, too, insurance covers major expenses, but you may still need cash to cover costs before your deductible kicks in. Plus, insurance doesn’t cover things like a broken heat system in the winter, dead air conditioner in the summer or deteriorating front porch that demands immediate, costly attention.
Loss of job
This is typically the main reason you need an emergency fund, when you’ll want cash to cover your expenses while you’re between paychecks.
Major health care or dental expenses
An emergency room visit can cause financial pain, too, whether you have health care coverage or not. Health insurance covers some expenses, except you’ll need money to cover co-payments and your deductible for surgery or other more major health care needs. Your flexible spending account can also help, but people who are healthy often don’t put aside enough money to cover major expenses like surgery.
Unanticipated tax bill
This can happen, often when you change jobs, tax laws change, buy a home or shift your investments. It’s best to be prepared if you do need to pay Uncle Sam more than you expected.
This is a “what if” most people don’t consider. For instance, a family member’s sudden death could mean you need to purchase last-minute airline tickets or take on the costs of road travel, hotels and other expenses.
The costs of these six situations could end up on your credit card, piling up interest or force you to dip into retirement accounts. Instead, get financially fit by starting and adding to an emergency fund so you don’t need to worry about efficient access to funds.