Irish playwright Oscar Wilde said, "To expect the unexpected shows a thoroughly modern intellect." Modern in today's world? Maybe. Financially responsible? Definitely. Being financially prepared for the unexpected with a healthy emergency fund account is a cornerstone of managing your finances. Experts recommend holding enough cash on hand to cover three to six months of living expenses. That amount will keep you afloat through a sudden loss of income or help you absorb a larger expense like a major home repair.
Even though this advice is fairly well known, Americans still have trouble maintaining their cash savings. Studies from Bankrate and GoBankingRates conclude that more than half of Americans couldn't cover a $1,000 expense from their savings accounts. That's fairly shocking, considering the Bankrate study also found that most financial emergencies cost at least $2,500.
And here's the annoying thing about emergencies. They don't discriminate. You might have a stable job and ample income today, but those factors don't protect you completely from financial catastrophe tomorrow. Here are seven reasons why you might need to have a nice store of cash on hand.
1. You own a car and/or a home
Accidents happen, as they say. And accidents involving cars and homes can be pricey. A survey from AAA found that the average cost of a car repair is $500 to $600. And data from real estate service Clever indicates that homeowners spend about $2,600 annually on home maintenance and repair. You might get some help from your insurance policies, but you'll still absorb deductibles and any premium increases that arise after your claims.
If you do have the cash available, you have the option to skip the claim and pay for your own repairs -- which may be the right move if you're worried about getting dropped by your insurer or seeing your premiums skyrocket.
2. You have one source of income
No one really expects to lose a job, but it happens. In October 2019, 1.8 million U.S. workers were laid off or discharged, according to the Bureau of Labor Statistics. Employers go out of business, downsize, restructure, and change directions. Even if your job feels stable today, tomorrow's circumstances could be quite different.
Your emergency fund serves two purposes when you lose your job. Primarily, it allows you to cover your bills without taking on debt. But it also provides breathing room so you can find your next good job opportunity. It'll be far easier to interview and evaluate your options when you aren't desperately watching your bills pile up.
3. You have kids or pets
More than 25 million kids under the age of 18 are taken to the emergency room each year. And the average, out-of-pocket cost of an ER visit is $617, according to a TransUnion survey. Any treatment required after that will likely involve more out-of-pocket costs, either as your deductible or co-insurance. Co-insurance is the percentage of costs you pay after you've met your deductible.
Pet emergency costs aren't cheap, either. Pet insurer Petplan estimates the average bill for unexpected pet care ranges from $800 to $1,500.
4. You have family
A family member who has a sudden illness or injury carries financial implications, even if you're not responsible for the healthcare bill. If that family member lives in another country or state, you may find yourself planning last-minute travel and taking unpaid time off work to help care for them. You'll appreciate having funds available in that scenario, so you won't have to weigh the expense of the trip against the severity of the health issue.
5. You use credit cards
Using credit cards for every purchase might earn you cash-back rewards and even out your monthly cash flow, but it also puts you at risk of identity theft. If your card number is stolen, you'll have to cancel that card immediately and wait for a new one. In the meantime, you could use your emergency fund to put gas in the car and buy your groceries -- without having to worry about overdrawing your checking account.
Usually the card replacement process only takes a few days, but it could be longer depending on the circumstances of the identity theft.
6. You don't have access to cheap debt
Having a large personal line of credit with a low interest rate doesn't reduce the chance of something bad happening, but it could keep you afloat temporarily if you don't have any cash on hand. Ideally, you'd only borrow enough to get by while you liquidate other assets like investments or collectibles. Then, you'd pay off the debt quickly to avoid snowballing interest costs.
Credit cards can't step into that role, because the high interest rate combined with your credit limit creates too much risk. The average interest rate on a standard credit card is 16.92%, which equates to $70 in interest each month for every $5,000 outstanding. If you can't pay off the balance right away, those interest charges add up fast. Plus, you risk maxing out your credit card and being unable to fund your everyday purchases.
7. You are open to new opportunities
An emergency fund can help you in positive situations, too. Dream job opportunities aren't always convenient. A job offer in another country might require you and your spouse to survive temporarily on a single income. Or, a role in a different industry you've always wanted to break into might mean a lower salary in the beginning. Having cash on hand gives you the flexibility to pursue those life-changing opportunities when they come knocking.
Cash on hand, just in case
Ultimately, having an emergency fund gives you the flexibility to manage seamlessly through financial upsets and take advantage of life's opportunities -- without borrowing on credit cards or cashing out your retirement accounts. Expect the unexpected and start tucking away some cash savings today.