What would you do if you lost your job and only had $500 in your checking account and 3 credit cards to pay your bills? What would you do if you broke your arm hiking and couldn’t afford the hospital expenses?
These are grave situations that people don’t like to think about, but emergencies happen. People often rely on credit cards in dire situations to fund any unexpected large expenses. The problem with using a credit card and paying off the expense over time is that the interest will end up making the emergency cost 2-3 times more than it would’ve if you paid out of pocket.
Life Pre-Emergency Fund
For example, you have to buy a last minute plane ticket to go to a funeral across the country and the entire trip costs $2,000. If you put it on your credit card with 17% interest and pay the $50 minimum, it’ll take 5 years to pay off and end up costing $972 in interest.
Funding large expenses with a credit card puts you in a hole and it’ll always be difficult to save money when your buried in credit card debt.
The Ingredients
This is why every one should have an emergency fund. Last week, I showed how to open a multiple savings accounts at your online bank. One of these multiple savings accounts should be your emergency fund.
This account will hold money you will only tap in case of emergency. An emergency is not a last-minute vacation or the iPhone 4. An emergency is an unexpected death in the family, an injury, a last-minute surgery, a loss of a job, a broken down car, or a theft.
Having money in this account will allow you to fund these unexpected events and remain above water without a) going in to credit card debt or b) worrying about maxing our your credit card limit when you should be concentrating on your emergency.
Size of Emergency Fund
There’s differing opinions about how much money you should have in your emergency fund, but it’s best to have anywhere from 3-6 months of living expenses if you’re single, and 6-12 months if you have a family.
That’s a lot of money, but don’t be discouraged by it. Right now, consider these numbers are goals. This isn’t something you need to have tomorrow or next Thursday, but it’s important you start funding this account ASAP.
What exactly are living expenses? Simply, it’s the cost of your day-to-day life. This includes rent, mortgage, household bills, internet, phone, food, car payment and insurance. Right now in Japan, my living expenses are very low so I’m fortunate that 3 months of living expenses is only around $2,000.
The emergency fund is your security blanket that allows you to sleep calmly at night and not have to wonder “what it?”
What if your car breaks down and you’ve already maxed out your credit card? What if there’s an unexpected death in the family and you need to fly cross-country? Having a sizable emergency fund will calm these worries because you’ll know you have money put aside for those events in a time of need.
It’s always important to have an emergency fund, but right now is no exception. Jobless rates are still near 10% and layoffs occur every day. The job hunt can last months so start the emergency fund today to insure yourself and your loved ones will be able to get by while you look for new work.
How much do you keep in your emergency fund?
Photo: Lomo-Cam
