There’s a reason it’s called “Murphy’s Law” and not just “Murphy’s Probability.” That’s because life rarely goes along as smoothly as we hope, and the idea that something will go wrong is probably the most reliable thing we can all count on.
Yet a recent National Foundation for Credit Counseling survey found that 64 percent of Americans wouldn’t be able to pay cash for an emergency expense of just $1,000. An emergency fund – ideally enough cash to cover six to eight months worth of living expenses – could help prevent an emergency from turning into a disaster.
Hopefully, you’re a believer and have already started building emergency savings. If you’re still not convinced of the value of such a fund, or if you’ve got one but aren’t sure when it’s appropriate to dip into it, consider these five times when having emergency savings could save your bacon:
1. You get hit with a major repair bill for your home or car.
Vehicle and home repairs can be some of the biggest expenses you face. And often, not doing the repairs is not an option, especially if not doing them means you won’t be able to drive safely or stay in your home comfortably.
2. You get hit with a major medical expense.
Four years ago, medical problems caused 62 percent of all personal bankruptcies, Harvard researchers found. It’s probably a safe bet that percentage has risen, given the economy. Most of those people had insurance, too. If you face a medical emergency that is not entirely covered by your insurance, your emergency fund could help you stay solvent.
3. You cause a vehicle accident and you’re underinsured.
If you’re to blame for an accident, will your auto insurance cover the full cost of repairing the other party’s car? Or, maybe it’s a relatively minor accident and you would like to pay for the repair rather than file a claim and watch your insurance rates rise as a result.
4. You’re applying for a loan and you don’t want to mess with your credit score.
Wise use of credit can be a lifesaver when an emergency arises. But if you’ve applied for a loan and an emergency crops up, using credit to cover the cost could affect your credit score – which in turn could affect whether or not you get that loan. Building your emergency savings means you won’t always need to rely on credit if something happens.
5. You lose your job.
This is when the real value of an emergency fund becomes apparent. If you’re out of work, those six to eight months of living expenses can help you avoid overusing your credit to stay afloat until you find a new job.