Roof leaking out of the blue? Car broken down in the middle of a highway? The unfortunate aspect of emergencies is that you never know when they are going to occur. These scenarios may consequently lead to you being hundreds OR even thousands of dollars out of pocket. However, an emergency fund could help put these worries to rest! But first, let’s take a look at all the other options.
Credit Card?
It is possible that you have a large enough credit limit that you can put a car repair or home repair bill on a credit card. However, the ability to do so may come with an interest rate of as high as 20 percent or more. Unless you know that you can pay off the balance by the end of the month or within the next 90 days, you should avoid credit cards if possible. However, if you do need your credit card for an emergency expense, you may want to talk a debt consolidation expert to help find ways to achieve debt relief.
Lender?
When you accumulate debt, you are faced with the prospect of making payments to a lender every month. In addition, your credit score may go down if you are using too much of your available credit. This may make it harder to get an apartment or get approval for a car loan.
It may also have an impact on your ability to get a job or get good rates on car insurance premiums. Therefore, you could be stuck living with your parents or living with a roommate when you otherwise could be living on your own. It may also mean that you have to work or live close to public transportation routes even if they aren't located in the most affordable parts of town.
Depleting Other Assets?
Failing to have an emergency fund may mean that you have to borrow from a retirement account or otherwise sell assets that could appreciate in value. In some cases, you may have to borrow from a superannuation account or stop making voluntary contributions to pay a lender instead. This could result in having to delay retirement or having to go without some of the things that you want or need after you stop working.
So How Big Should Your Emergency Fund Be?
Ideally, your emergency fund should be large enough to handle any type of unexpected expense that needs to be paid. Therefore, you will want to save up at least $1,000 if you currently have nothing saved today. However, you should aim for anywhere from $2,500 to $10,000 depending on where you live, if you have kids and if you rent or own your home. To protect against a job loss, it is recommended that you have six to eight months’ worth of living expenses in a segregated account.
You can't schedule a roof collapse or a flat tire on your car. All you can do is put money into an emergency fund on a regular basis to prepare for what happens after an emergency occurs. By being proactive, you may minimize the financial impact of such an event both now and in the future.