What are you going to do the next time your vehicle needs emergency repairs? What about when your child gets sick and needs an expensive treatment that’s not covered by insurance?
If you intend to be financially successful, you need to be prepared for any emergency that might require quick money to handle. You can’t predict every emergency before it happens, of course, but you can be prepared if you have a catch-all financial emergency plan that equips you to tackle almost any potential emergency that could strike.
According to MotleyFool.com, about 70 percent of Americans have less than $1,000 saved in the bank, so if you have more than that, you’re doing better than the majority—but there’s always room for improvement.
Related: The 7 Simple Habits of Financially Successful People
Types of Emergencies
First, you should be prepared for the various types of financial emergencies you might face:
- Vehicular collisions. In an ideal world, after a traffic crash, the party who’s responsible will cover all damages with his or her insurance policy, and you’ll be able to proceed with your life as if nothing happened. You could be the victim of a hit and run—but you could run into insurance issues or you could suffer a debilitating injury that prevents you from working. Legal action can help you cover your expenses, but that will take time to resolve—you’ll need to go through the discovery process, strive for a settlement, and possibly proceed to court—and you’ll still need an emergency fund to cover temporary cash shortfalls in the meantime.
- Injuries and illnesses. You can never know when you or a loved one may fall ill and become unable to work. Again, you’ll need an emergency fund to pay expenses not covered by insurance and make up for lost wages in the short term.
- Major home repairs. If your roof starts to leak, you’ll need to fix it as soon as possible. Some home issues could render your house unlivable, and others will only increase in severity the longer you allow them to go unaddressed.
- Natural disasters. Insurance covers many natural disasters, but you may discover certain specific expenses are not included or that your insurance plan doesn’t reference specific disasters.
- Job loss. Even if you’re amazing at your job, you may be laid off or otherwise unable to work. You’ll need to be prepared for that kind of income shortfall as well.
Strategies for Your Emergency Savings
If you’re putting together an emergency savings plan, here are the strategies you’ll need to keep in mind:
- Plan for at least three months’ worth of expenses. The size of your emergency fund will vary based on your personal risk tolerance, the types of emergencies you’re most likely to encounter, and your personal circumstances (including your income). However, Vanguard recommends you set aside at least three months’ worth of expenses and preferably six months or more. You need to know how much you spend in a typical month and plan to cover at least three months to be safe.
- Only use the fund for real emergencies. Once you have established such a fund, don’t tap into it for anything else. This isn’t a cache of handy extra money you can use for a vacation nor is it a surplus for splurging on Christmas gifts at the end of the year. The fund is only for emergencies and shouldn’t be touched until you’re forced to cover an expense that your regular income can’t absorb.
- Estimate your home repairs. Most experts recommend that homeowners save about one percent of their home’s overall worth for estimated home repair and upkeep costs in any given year. For example, if you live in a $250,000 structure, plan to spend about $2,500 in annual repairs. This may increase or decrease depending on your home’s age and condition.
- Have a backup plan. If your emergency fund isn’t enough to cover an unexpected expense, what backup plans do you have in place? It may seem superfluous to have an emergency fund to cover your emergency fund, but you’ll be glad that backup parachute is there if you should need it. Credit cards, retirement plans, and college savings are all viable options, but obviously, you shouldn’t use them unless you have to.
- Be proactive. If you can, try to prevent emergencies before they occur. Invest in solid insurance policies that protect you from the bulk of unplanned expenses you’d otherwise face. Take care of your home with upgrades and as-needed repairs. Attend regular medical checkups and keep your vehicle in good running condition.
- Keep your money somewhere safe and liquid. Finally, store your emergency fund money in a safe location where you can access it easily. Most mainstream banks are federally insured for up to $250,000 (and sometimes more). A savings account won’t earn much interest, but it will ensure your cash is instantly available if you should need it.
Given the above tips, you might not be ready to handle any conceivable emergency that happens to you, but you will be fairly well prepared to address the financial repercussions. When you maintain an insulating layer of savings, you’ll avoid having to dip into more critical funds such as your retirement accounts, and your day-to-day cash flow will remain uninterrupted.
With any luck, your emergencies will be few and far between, but it’s better to be unnecessarily prepared than unprepared when you need to be.
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