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10 Expensive Life Events You'll Definitely Want an Emergency Fund For

Author: Catherine Brock | September 14, 2021

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Protect your financial health

Do you really need an emergency fund? Definitively, the answer is yes. Surprise financial disasters happen. And when they do, a cash emergency fund may be your only protection from a huge credit card balance or a 401(k) loan that puts a comfortable retirement out of reach.

If you're not convinced that an emergency fund is necessary, read on for a look at 10 expensive -- and common -- life events. Each could be financially disastrous unless you have cash on hand that's already earmarked for the unexpected.

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1. Car repair

In 2019, more than 12 million vehicles were involved in traffic crashes. The cost to repair a car after an accident largely depends on your insurance coverage. If you have full coverage, you'll likely absorb a $500 or $1,000 deductible. But if you don't have collision coverage and you caused the accident, you could pay thousands to get your car back on the road.

Even without traffic accidents, you will experience unexpected vehicle maintenance costs. The American Automobile Association (AAA) estimates the annual cost of vehicle maintenance and repair at $0.09 per mile driven. That's $900 annually if you drive 10,000 miles a year. Your maintenance cost could hit you in small increments or all at once every few years. Auto insurance and extended warranties generally do not cover routine maintenance costs.

ALSO READ: 4 Simple Tips to Ensure You Have an Emergency Fund Within a Year

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2. Emergency home repair

Home repair is another common financial emergency. If the damage in your home was caused by a covered loss in your insurance policy, your expenses may be capped at your $500 or $1,000 deductible. That's the best-case scenario.

Unfortunately, your homeowners policy probably covers less than you think. As with car insurance, homeowners insurance does not pay for problems that arise over time, such as sinking foundations, mold due to humidity, or water damage related to an ongoing leak. Any one of those issues can cost tens of thousands to fix.

On average, homeowners spend about $3,200 annually on home repair and maintenance.

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3. Work furlough

A furlough is a temporary and mandatory unpaid leave from work. Your employer can reduce or eliminate your hours (and your pay) for weeks or months. You may still earn benefits during that time. You can apply for unemployment while you are furloughed.

Employers implement furloughs to save on costs. The practice became commonplace during the coronavirus lockdown in 2020. Disney, for example, furloughed 100,000 workers when it shut down its theme parks.

Even with unemployment, a furlough normally leaves you with much lower income. Having an emergency fund on hand allows you to cover your income shortfall temporarily, without reaching for credit cards.

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4. Job loss

Job loss can be one of the most damaging financial emergencies, because it leaves you without pay and, often, without health insurance.

Financial experts often recommend an emergency fund balance that will cover three to six months of your living expenses -- in case you get laid off. In 2020 and 2021, most unemployed individuals remained without work for 27 weeks or longer, according to the Bureau of Labor Statistics.

Fortunately, unemployment will help you stretch a six-month fund to last longer. Prior to the pandemic, the unemployment wage replacement rate averaged 38%. It's been higher recently, thanks to weekly unemployment supplements sponsored by the feds. Those weekly supplements expired on Sept. 6.

Assuming an average salary of $990 weekly and an unemployment wage replacement rate of 38%, a 27-week stint of unemployment would cost about $16,000 in lost pay.

ALSO READ: 3 Things You Should Never Do With Your Emergency Fund

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5. Injury or illness

A battle with coronavirus or a wrong step in a stairwell can easily send you to the emergency room. Any hospital visit is likely to cost you plenty, even when you have health insurance.

With insurance, your out-of-pocket costs for a hospital visit may include a deductible plus coinsurance. Debt.com reports that the average insurance deductible is $1,644 for single coverage. Also, most (65%) employer-sponsored health plans do have coinsurance, which averages 20%. Given that the average hospital stay costs $11,700, your piece of the bill could be several thousand dollars -- or a lot more if you don't have healthcare coverage.

For severe injuries or illnesses, your health plan's out-of-pocket maximum may be a factor. According to the nonprofit healthcare advocate Kaiser Family Foundation, 11% of employer-sponsored plans cap the insured's out-of-pocket costs at less than $2,000. That's the good news. The bad news is that 18% of employer-sponsored plans have an out-of-pocket limit that's $6,000 or more.

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6. Sick or injured child

When a child or spouse is sick or injured, you may have more to contend with than medical expenses. Your child or spouse may need full-time care at home, for example. That can lead to missed work and lower paychecks, or the added expense of a home health aide. In-home care could set you back $150 per day on average, according to insurance carrier Genworth Financial.

Health insurance usually doesn't pay for in-home care, either. There actually isn't much assistance available for families facing high costs for in-home care, especially when the patient is a child. Seniors may be eligible for temporary assistance from Medicare. Medicaid does cover these expenses, but only for impoverished households who meet strict asset and income requirements.

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7. Unexpected travel

When a faraway family member becomes seriously ill, you may incur travel expenses to visit your loved one. You may also miss work and some of your pay in the process.

If you find yourself in this situation, you can contact airlines by phone and ask if they have bereavement or medical emergency flights available. Not all airlines offer these discounted, last-minute fares, but it doesn't hurt to ask.

Depending on where your family member lives and how long you plan to stay, your total expenses could be several thousand dollars.

ALSO READ: Is $1,000 in Emergency Savings Enough?

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8. Pet injury or illness

Your pets can have emergencies, too. Dogs and cats are commonly brought into pet hospitals for digestive issues, exposure to household poisons, and injuries resulting from being hit by a car. Your pet's medical emergency may be as pricey as a human emergency, with costs often ranging from $500 to $1,000. Bite wounds and car collisions can cost far more, upward of $8,000.

Pet insurance can help with these costs if you have it. Without insurance, you probably have to fund the necessary procedures with your cash savings or a credit card.

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9. Taxes

Tax day can bring a bad surprise if your tax payments fell short in the prior year. There are two common reasons for the shortfall. One, your paycheck withholding may have been too low. Or, you earned money outside of your paycheck and didn't make sufficient quarterly tax payments.

You'll have to pay the taxes themselves and, possibly, a penalty on top. The IRS assesses an underpayment penalty when you don't pay at least 90% of your owed taxes or at least 100% of the prior year's tax bill. You have to meet those thresholds in the tax year, too. You'll still owe a penalty if you catch up in the following year when you complete your tax return.

If you can't pay the taxes and any associated penalty, the IRS will charge interest from the date your tax return is due until you pay the full amount.

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10. Theft

A stolen car does more damage than leaving you without transportation to work. If you don't have comprehensive insurance, replacing the car is entirely your responsibility. If you do have comprehensive insurance and no car loan, the insurer should reimburse you for the car's market value, less your deductible.

Introduce a car loan to this situation and things get more complicated. The funds from the insurance claim will go to your lender first. The amount may be enough to pay off your loan, or it may not be. Any shortfall is your responsibility unless you have gap insurance.

After you pay your deductible plus any remaining balance on your loan, it's on you to purchase a new car.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

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An important safety net

Car accidents, injuries, sick pets, vehicle thefts, and many other costly surprises happen every day. Your emergency fund cash minimizes the long-term financial effects of these events. Even if you don't have enough cash to fully cover a $4,000 plumbing repair or your dog's $8,000 surgery, whatever you do have lowers your borrowing need. And that can save you thousands in interest charges over time.

Think of your emergency fund as your insurance policy for the unexpected. The cash along with your traditional car, home, and health insurance gives you a solid one-two punch to manage the worst financial surprises.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.

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