Financial Fitness Zone

10,000 reasons you need an emergency fund

The concept of saving for a rainy day is extremely challenging for some people: What if it never rains? It can be really difficult to put aside thousands of dollars for an emergency that may never occur, especially when you have other financial goals you'd like to reach.

Of course, if you haven't saved up to pay for the unexpected, an emergency could land you in debt, which is something no one wants to deal with.

Plan for the Worst

To underscore the importance of an emergency fund, here's a story of someone who incurred $10,000 of unexpected costs in five months. His emergency fund covered the bills, and he shared his story on Reddit, as a lesson for anyone who wonders about the value of such savings.

The $10,000 of expenses resulted from a lot of bad luck. First, medical bills from an ER visit and treatment for a kidney stone cost him about $5,000. The same month, someone backed into his car, and repairs cost about $800. In the past few days, a rock hit and cracked his windshield, and while getting his tires rotated, mechanics discovered additional service his car required, adding up to about $2,200. He budgeted for some of that, he wrote, but he did NOT budget for the costs associated with getting hit by a car. He missed some work after the car-pedestrian accident, and he factored the lost wages into his overall expenses.

Other than dealing with an unfortunate series of events, this guy was in a pretty good position. He had the cash on hand to manage costs he hadn't planned for, and he ended his post saying he has a plan to replace what he had to withdraw from his emergency fund.

That's a move straight from the financial planner's playbook: Save the money, get through emergencies with as little financial stress as possible and quickly replenish the fund.

Without Savings, You Have Debt

Consider what would have happened if the man didn't have money set aside for a rainy day: Medical bills from the kidney stone could have gone to collections if he couldn't pay them. He could have financed the car bills on a credit card, but he may have put himself in expensive debt as a result. He may have chosen to drive a damaged car, which carries financial and safety risks. Perhaps he could have applied for a personal loan to cover the expenses, as well.

In that scenario, he's going to have to direct a lot of financial effort toward paying down the debt. The longer he carries the debt, the more expensive it will get as interest compounds. Having a high balance on his credit cards could hurt his credit score, because you want to keep your balances as low as possible, in relation to your overall credit limit. If he incurred medical debt, collections accounts could appear on his credit report, which have an adverse affect on your credit standing and could make it difficult to access other forms of credit in the future.

An emergency fund not only gives you peace of mind, it also protects your credit standing. High debt levels, late payments and negative trade lines on your credit report will damage credit scores, which you can see by tracking your score using the tools included in a free Credit.com account, and if something as simple as sufficient savings can help you avoid those problems, it's worth the effort. It can be intimidating to try and save three to six months' worth of expenses, but that's exactly why it should be a priority: If you don't save, you're almost certainly going to fall into debt, which is a lot more daunting to tackle.

More From Credit.com:

How Much Debt Is Too Much?       

How to Create an Emergency Fund in 30 Days or Less  

How Medical Debt Can Affect Your Credit Score 

 


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