You don't need to be a financial expert to understand the value of an emergency cushion. This is money that you set aside specifically for an emergency. Most financial planners recommend a 6 to 8 month cash reserve. It can be difficult to save this much, but even if you cannot save six month’s worth of income, a small emergency cushion is better than none. Here are seven reasons to put money away for a rainy day.
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1. Job Loss
An emergency cushion can provide peace of mind after a job loss. You might receive a weekly unemployment check, but in all likelihood, this check will not cover all your monthly expenses. Without an emergency cash reserve, you might need to borrow money from family or significantly adjust your lifestyle. Saving money for a rainy day can keep your head above water until you find a new job.
2. Medical Expenses
Even if you have medical insurance, a high deductible and non-covered costs can create high medical bills. You can work out a payment plan with your medical provider. But with an emergency fund, you don't have to spread out payments. You can pay off your debt and move on with your life.
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3. Car Repair
Car repairs tend to happen at the worst times, such as right before a road trip. New tires, brakes and other maintenance can be costly. If you do not have an emergency fund, you might have to bum a ride from friends and family, or rely on public transportation. This is a major inconvenience, but one you can avoid. Put money aside each pay period and you'll have funds to deal with a car repair.
4. Home Repairs
If you have a landlord, you can call this person to fix things that break around the house. Unfortunately, homeowners don't have this luxury. Your house may need a new roof, new windows and other updates. With a cash reserve, you can handle these repairs as they arise.
5. Natural Disasters
Nobody wants to think about a hurricane or tornado blowing off their roof or causing other property damage. Yes, you have homeowner’s insurance to cover these expenses. But in most cases, your homeowner’s insurance has a pretty high deductible. This is the amount you pay out-of-pocket before your insurance kicks in.
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6. Avoid Credit Card Debt
Too much credit card debt lowers your credit score and kills your peace of mind. Some people incur debt from overspending. But in many cases, credit card debt is caused by unforeseen circumstances. If you do not have an emergency fund to handle expenses as they pop up, you may rely on a credit card to get through a financial jam. Credit cards are great in this capacity, as long as you pay off the balance quickly.
7. Avoid Payday Loans
If you do not have a savings account or a credit card, you might see a payday lender and apply for a short-term loan. These loans provide quick cash, plus you don’t need good credit. However, payday loans have high interest rates and steep late fees. A financial cushion can alleviate the need to apply for a risky subprime loan.
Saving money and building an emergency fund takes discipline and effort. However, once you achieve a sizable account, you’ll be happy that you made the sacrifice. What is your strategy for increasing your emergency savings?
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