Any emergency savings is better than none at all. As the name implies, it’s money that you set aside for emergencies online. Everyone has their own meaning of the word emergency, and it’s important that you define it before an unforeseen incident comes to light.
Here are some of the many examples of an emergency:
1. Medical emergency
Even if you have medical insurance, there’s always a chance you could find yourself overloaded by medical debt. With an emergency account at your disposal, there’s always somewhere to turn if you need help with this type of financial challenge.
2. Home repair
Even if you live in a new home, you never know when a problem could arise. Examples include roof repair, foundation damage, and insect damage.
Just the same as medical insurance, your home insurance policy is not designed to cover every loss. For instance, poor grading can result in foundation damage, but that’s not something that your home policy will cover. Instead, you need to pay for the repairs out of pocket.
3. Car repair
When you have a warranty on your vehicle, you don’t have many concerns about uncovered repairs. However, your warranty will not last forever. And when it runs out, you’re responsible for all maintenance and repairs.
Without a car, you’ll find it difficult — if not impossible — to commute to and from work, to visit the grocery store, or to take your kids to extracurricular activities.
4. A loan to a family member
Your emergency account is your emergency account. But that doesn’t mean you should necessarily keep all the money to yourself. If a family member or good friend runs into a financial hardship — such as a job loss that’s putting their home at jeopardy — you may want to consider using funds from your emergency account to assist them.
The key here is 100 percent certainty of what you’re getting into. Do you expect the person to repay the money in the future, as they can? Do you expect them to repay the money over a predetermined period of time, with interest? Do you consider it a gift?
Also, don’t loan (or give) money if doing so will put you in a compromising financial position. You should always review your personal finances before you decide to loan money to someone else.
There are two challenges of an emergency savings:
- Saving money in an account that you know you’re not supposed to use
- Keeping the funds in the account, as opposed to sneaking money for purchases other than emergencies
Now that you know what an emergency is, you can feel confident in the way you build your account and how you use it.
Do you have an emergency fund? Have you ever had to use it? What do you consider an emergency?