Could you afford an unexpected cost of $500 right now? About half of Americans would answer, “no.” What about a more serious emergency such as a job loss? The standard emergency fund is three to six months of your living expenses. Only about 23% of adults have an emergency fund saved up.1
I know it sounds like a lot (it is), but the future is volatile. This covers those unexpected costs that crop up throughout the year. Things like flat tires, travel for funerals, house or car repairs, medical bills, and job loss. Despite the low unemployment rate right now, it takes the average job seeker 16 weeks to find their new job.2 Some people fall into long-term unemployment, or have to miss work due to a medical emergency.
If you're not ready for something like that to happen, you are not alone. One of the following reasons could be why you, along with 77% of American adults, don’t have an emergency fund. Read on to find out which applies to you.
1. "I am paying down debt."
If you are putting every penny into paying off debt, it is even more important to have an emergency fund. Otherwise, every unexpected expense takes you off track. If a severe emergency happens, you'll have no way to make your debt payments at all.
This sort of situation will take some careful budgeting. Set aside some money to save each month. Otherwise, if something happens you'll create even more debt.
2. "That much money is better off invested somewhere else."
Maybe, but investments are a gamble. Even Warren Buffett has lost big on investments. Denver Community Credit Union’s savings options are safe and insured.* What if losses in the market are what caused your emergency. Those who job hunted during the Great Recession will remember what that was like.
It doesn't have to all sit in a savings account. Consider splitting is up based on the type of emergency. You could use a Health Savings Account (HSA) for medical emergencies. Since bigger emergencies don't happen that often, you could grow some of your fund in a CD or Roth IRA. It is possible to still come out ahead even if you need to pay early withdrawal penalties. Some of these option could also lower your tax burden or roll into retirement. **
3. "I like to live in the now."
Wow, how cool is that? But the future version of you would like to have some fun too. Another way of interpreting, "YOLO" is that there is only one chance to do things intelligently. (Do people still say YOLO?) What happens if your “living once” lasts a long time?
Consider calling it a spontaneity fund instead. It would be nice to have something set aside for an unexpected adventure. And while you go to get that tattoo that says "no egrets" and you get a flat tire on the way, you'll be set.
4. "I don't have that kind of money."
Well, of course not yet. 3–6 months of expenses is a challenge for everyone. But it can be even more expensive not to have an emergency fund. Ironically, unexpected expenses are a certainty. If you don't have the money when you need it, you'll have to borrow or use a credit card which is more expensive in the long run.
People often receive money that they didn't budget for such as a raise, bonus, or tax return. If fact, there was a recent minimum wage increase. Consider automating or transferring the extra money into a savings account. Your other option is to look at which expenses you can live without.
If you have never saved before, it can seem daunting. Start small. Try to build a flat tire fund. Once you achieve that, build a fund for a larger repair. By then, saving will become a habit and you'll learn not to miss that money. Our E-Learning course, "Building Emergency Savings," can help you get started. If you need any help or have questions about any of our savings options, feel free to contact us.
*We are federally insured by the NCUA for up to $250,000.
** Please consult with a tax advisor.