You have plans for your money, whether that's paying bills, funding an expensive purchase, or financing an activity you love. Your plans probably don't include a costly emergency, but unfortunately, you don't have a lot of control over whether one comes your way. So you do the next-best thing.
You should have an emergency fund containing enough money to cover three to six months of living expenses, so you don't have to take on debt when a crisis happens. If you don't have one already, here are a few costly reasons to think about building one.
1. Job loss
The reason you should have three to six months' worth of living expenses in your emergency fund is to protect you in case you're out of a job for an extended period of time. If you have an emergency fund, you don't have to worry about your family falling into debt or losing their home, and that can take some of the stress off of you.
You could also make things easier on yourself by claiming unemployment benefits, if you're eligible, while you hunt for a new job so you don't have to use up your emergency fund as quickly. You may want to cut back on discretionary spending, too.
2. Medical emergency
Even if you consider yourself to be a healthy person, you never know when an injury could sideline you, your spouse, or one of your children. This could prove to be even more costly than a job loss because you'll have medical bills and you could have to stay home from work for a while. If you don't have enough savings to cover your health insurance deductible, start setting aside a little money every month until you do. You might want a little extra cushion in your emergency fund if your insurance company requires you to pay a copay for many of its services.
Consider saving the money for your health insurance deductible in a health savings account (HSA) if you're eligible for one. Contributions to HSAs are tax-deductible, and if you use the money for medical expenses, you won't owe any taxes on it at all. These accounts are only available to individuals with a health insurance deductible of $1,400 or more and families with a deductible of $2,800 or more. Individuals may contribute up to $3,550 in 2020 and families may contribute up to $7,100.
3. Auto or home insurance claim
A car accident or a tree falling on your home shouldn't cost you tens of thousands of dollars, assuming you have insurance, but you'll still have to pay your deductible. This can be several hundred to a few thousand dollars, depending on your policy. You might struggle to cover this without an emergency fund.
If you're trying to save money on your home or auto insurance, consider choosing a plan with a higher deductible. This will get you lower premiums, and you can use the money you're saving on premiums every month to build up your emergency fund. Should you need to file a claim, you'll have the money to cover the deductible at hand.
4. Vet bills
Many of us consider our pets to be part of our family and we want to help them when they become sick or injured. Vet bills might not be as expensive as human doctor bills, but they can still cost you several thousand dollars. Without an emergency fund, you might face a tough choice between taking on debt to save your pet or having to put them down because you cannot afford to get them the care that they need.
Pet insurance is becoming increasingly popular, and this can help you cover some of your pet's vet bills. But just like human health insurance, it includes premiums and deductibles. Pet insurance also rarely covers expenses in full, so you'll have copays to worry about. You can use your emergency fund to help you cover some of these costs.
5. Early retirement
I don't need to tell you that retirement is expensive, but hopefully, you're already planning for that. But you're probably not planning on an unexpected early retirement. An injury, a job loss, or needing to care for a sick family member might force you to step back from the workforce sooner than you expected, and this could easily cost you tens of thousands of dollars. Even an emergency fund might not be enough to cover the full cost of unplanned retirement.
The best thing you can do to prevent this financial crisis is to save as if you plan to retire early so you have a large nest egg in your retirement accounts that can sustain you for several decades. But if you aren't able to do that, you can try transitioning to part-time work or seeking out a flexible job that will enable you to work from home and create your own schedule, assuming you're still able to work. You could also try starting Social Security as long as you're at least 62, but if you begin claiming this young, you could cost yourself money over the long run.
We never know what emergencies are coming our way or how much they might cost, and that makes planning for them difficult. But having an emergency fund and proper insurance policies in place can do a lot to ease the burden. If you haven't prepared for any of the five expenses listed above, go back through your emergency plan and make some changes so you're ready for anything.