It is risky to live from paycheck to paycheck. If you drain your checking account to almost zero every month, you will go into debt when you have to deal with unexpected expenses. Most people end up putting unpleasant surprises on their credit cards, and the interest continues to put them further into debt. By establishing an emergency savings account, you give yourself the ability to weather financial storms.
Unexpected Medical Expenses
You never know when you or someone in your family will have a medical emergency. According to Boohoff Law, even mild injuries can have long-term consequences and lead to costly medical bills. Take some time to investigate your health insurance plan. Even with good insurance, your health expenses can add up. You might want to have a savings goal that covers your annual deductible. That way, you will have the cash on hand to get you through the year.
You cannot control the economy. Any investor will tell you that the stock market has periods of growth and periods of loss. When the market is good, some people want to invest all of their money. Vanguard suggests setting aside at least six months’ worth of your salary in a regular savings account. After you have that money in place, you can start to invest with confidence. When you have an emergency fund, you can wait out the market as it goes through a dip. You will also have the resources to sustain you if your employer has to downsize during a financial recession. The savings will give you some breathing room as you look for a new job.
For many people, a car is necessary to get to work. When the car breaks down, they may have trouble getting to their job. Not only are car repairs expensive, but they also happen at the least convenient time. It is wise to set aside about a thousand dollars to handle unanticipated repairs. This amount may not cover the cost of extensive engine work, but it will handle most routine repairs, like brake work or a new set of tires. It is also a good idea to set aside enough money to cover your car insurance deductible. Accidents happen, and you want to be covered when they do.
Saving emergency money can feel like a difficult task. You do not need to set aside that money all at once. Get into the habit of putting a little bit of each paycheck into a savings account. Twenty dollars set aside each week will give you a $1000 buffer in less than a year. Most importantly, you’ll have peace of mind when you know that you can deal with the unexpected.