Expect the Unexpected: The Emergency Fund
Did you know that according to a 2021 survey showed only 39% of Americans would be able to afford a $1000 emergency expense without going into debt?[1] Keep in mind this statistic was released in January of 2021, a period when the federal government gave economic relief to Americans through unemployment aid and stimulus payments. While the government may have the powers to bail us out of our macroeconomic emergencies, what happens with our own personal emergencies? This brings me to the title of this month’s blog Expect the Unexpected: The Emergency Fund
I have noticed one piece of advice that is consistent in the financial world regardless of age or financial status and that would be to always have an emergency fund. I like to think of financial planning like climbing Mount Everest, with the peak being your financial goal. But you wouldn’t climb the mountain without gear right? The emergency fund is your gear and equipment in your financial journey, without it, it's hard to remain on track. The emergency fund is the money stashed away that people can use in times of financial distress. Its purpose is to give you a sense of financial security by creating a safety net that can be used to meet unanticipated expenses. What exactly do unanticipated expenses entail though?
Step 1: Figure out the most common unexpected expenses
Source: gobankingrates.com/saving-money/budgeting/how-americans-use-emergency-fund/
Home Repairs
The largest eater of emergency funds falls within the home repair category. As you can see from above, this Bank Rate survey showed that in 2018 that 26% of savings go to home repairs and maintenance. One good rule of thumb is to expect to spend about 1%-4% of your home value on repairs each year. The most common type of emergency home repairs: Water heaters, roof, siding, HVAC system, foundation, deck, water, and sewer line.
Car Repairs
I apologize for my readers out there, but I am not a car specialist. I know almost nothing about cars, but I know how to drive a stick shift and that’s good enough for me. In 2019, the average car repair costs came out to $384.90 for Americans.[2] However, a 2020 state repair study revealed that California drivers paid the most money in the nation for repairing their vehicles with an average of $414 a year.[3]
Medical Emergencies
COVID has put a spotlight on health awareness and has even caused me to make healthier goals and lifestyle changes. However, understanding that you will probably get sick at some point in the future is a wise assumption. Even the most minor of illnesses or injuries could result in not being able to work, on top of the expense of having to get treated. According to United Health care the average cost of emergency room visits in 2021 is $2,200 without health insurance, while emergency surgical procedures average about $20,000 or more.[4]
Job Loss
Think about how long it took you to get the job you are in now, or maybe what the availability is of jobs within your field. So if for any reason you lose your job, ask yourself how would be able to pay your bills if you did not have an emergency fund?
Technology Emergencies
Hopefully, all of us have gotten more tech-savvy during the virtual pandemic. So, we all relate to this category in some way. We have all probably all had a phone crack once in our lifetime, seeing it face down on the concrete fearing to flip it over only to see it SHATTERED in a million pieces. So to avoid this future inconvenience let's all agree to include technology in the emergency funds. By the way, the average home has 25 electronic devices with U.S. households spending an average of $1200 a year for technology purchases and upgrades. [5]
Kids/ School Expenses
I remember my parents sending me to school with checks for various school expenses growing up, considering that most schools don’t accept credit card payments for such costs as field trips, sports equipment, and dues, uniforms, etc. So, it’s important that you have the cash on hand to pay these expenses when they come up. Keep in mind I do not have kids of my own so it’s hard to add to this category, but I have received some advice from coworkers about kids. I was talking to Diana about a Pilates class that she takes during her lunch hour, when I looked at her confused (WHO WORKS OUT ON THEIR BREAK?), she responded with, “Claire you don’t get breaks with kids”. Ah …how I think of the many times I’ve heard that same line from my own mother.
Step 2: Planning Your Emergency Fund
The next major part is figuring out how much you need in your emergency fund. We are all different and have experienced various financial emergencies. We explain that cannot predict the market, and that goes for your luck as well. The general formula we recommend is to save up to 3-6 months’ worth of your living expenses, but before you start building your emergency fund analyze your monthly expenses and separate out the needs and the wants. Then create goals around ways to reduce the want spending category.
Step 3: How to Build Your Emergency Fund – Life Hack Edition
These are simple tips from myself, as well as a list from the office of various tips and tricks that help to build your emergency fund. Not only do these help you save money but increase your overall wellbeing in the process. #financiallifehacks
- Set up Automatic Transfers – Every advisor listed this as their number #1 way to start building an emergency fund. I have learned through rollover 401(k) or is it a transfer? (Financial advisor joke) that your employer matches contributions and your personal contributions are a huge part of your job, even though it’s hard to think about it because you never see it, think about it, and you know you can’t touch it. So, we advise making direct deposits automated into a new account that is specifically set aside for your emergency funds and make your contributions! You can ask your employer to set aside a percentage to put away into a separate account or you can even use apps to help you out with this.
- Find more economic ways to spend time with your family – This could be as simple as committing to family dinners each week, going on a family hike with the dogs, or even creating a movie night tradition.
- Shop for clothes that are on sale! –
- Ordering your groceries online – This is a personal hack that has helped save me at the grocery store. We all know that those quick grocery store trips are the worst, and we go in with 2 things on our mind and end up leaving with 10 items. According to a psychology study about supermarkets, they are not only designed but also engineered with one goal in mind- to make you spend as much as possible. Ever thought about how… vegetables are always at the front of the store; this is so you won’t feel as guilty picking up more junk items down the aisle later on. Or maybe the fact that the essentials such as bread, milk, and eggs are usually at the back of the store, so you must walk through dozens of isles first to pick up things you don’t need. [6]
- Write down your budget or financial goals – You are 42% more likely to complete your goals if you write them down!
In Conclusion
I hope this article helps you understand that you need an emergency fund and gives you motivation or knowledge as to how to start building one. I love reflecting on the things I’ve learned in this field so far and am lucky enough to be surrounded by intelligent people to learn from every day. It is like a complete immersion language program sometimes, but it takes time to learn, and I like sharing my interest along the way with new people! Thanks!
~ Claire Olmstead
[1] bankrate.com/banking/savings/financial-security-january-2021/
[2] supermoney.com/common-car-repairs-average-cost-finance/
[4] nytimes.com/2021/06/10/health/united-health-insurance-emergency-care.html
[6] realsimple.com/food-recipes/shopping-storing/food/grocery-store-layout