Why Should Creating An Emergency Fund Be A Top Priority
Why SHOULD creating an emergency fund be a top priority, you wonder?
Sometimes we know we should do something, but we don't do it because the reasoning hasn't really hit our hearts.
Age old tropes like drink eight glasses of water per day and eat healthy seem to go in one ear and out the other. It's good advice, so why do we ignore it?
As humans, we really aren't as logical as we think we are. People as a whole act based on what their feelings tell them to do, not what reason tells them to do. It's hard to admit, I know!
But it's the same reason we all ignore common knowledge at times, despite knowing that it would be best for us. Wisdom really needs to hit us in the heart for us to act, and so I thought I would write this post to help you envision and feel the reasoning behind building an emergency fund.
I hope this post helps you get started, even if you can only save a little bit at a time!
1. You'll Need An Emergency Fund Before You Can Buy A Home
Like most things in life, there is an order of operations that comes with buying a home. First, you should eliminate any high interest debt like credit cards and payday loans.
Then you need to save up an emergency fund so that when your hot water heater breaks or your roof starts leaking, you don't end up in a pickle. After you have a solid emergency fund, you need to start saving for your down payment.
You'll need at least 5% of the cost you'd like to buy for a down payment, plus a bit more to cover closing costs and fees.
Buying a home is an expensive venture, and you want to make sure you are prepared. An emergency fund is there to ensure that you don't lose your home after you spend tens of thousands of dollars to move into it.
2. Be Prepared For A Job Loss or Pay Cut
If you were older than 10 years old when 2008 hit, you very likely know someone who lost their job or had to take a significant pay cut. These sorts of recessions do happen, and they happen somewhat regularly. Usually, they aren't quite as severe as what the world faced in ‘08.
That being said, you need to be prepared. There will be more recessions in the future, and it's up to you to make sure that your family can float through them. An emergency fund of three to six months of bare bones expenses can help you manage the transition to a new job or a lower paying position.
3. You May Need Extra Savings When You Have A Baby
Having a baby in the US is not cheap. Between medical costs, missed work days, and unpaid maternity leave, the cost can be in the tens of thousands. Having an emergency fund before you get pregnant is a really great idea. There may be times when you need to take some time off due to illness, and you may run out of PTO days.
Many families with working mothers find that taking a maternity leave is going to cost them. While FMLA does allow for 12 weeks of maternity leave after the birth of a baby, that time is unpaid.
Fortunately, you may be able to arrange a series of PTO, vacation, and short-term disability days to give you a few weeks or months of paid maternity leave. If the birth ends up harder than you expected, however, an emergency fund can help float you while you recover before going back to work.
4. Cover the Gap Between Short-Term Disability Pay and Your Salary
Short-term disability insurance is one of those things I recommend to every single working person out there. It's the type of insurance that will pay most of your salary if you are injured off the job and can't work.
Most short-term disability insurance policies cover between 60% and 70% of your salary. While this is an extremely useful insurance to have, you may need a full match if your paycheck isn't much higher than your monthly expenses.
If you were to get injured and need to take time off work, your emergency fund could help make up for that other 20% to 30% that the short-term disability doesn't cover.
One important thing women should keep in mind is using short-term disability insurance for pregnancy. This is a great way to cover a portion of your time off and get paid for it.
The catch here, however, is that you need to apply for a short-term disability policy before you get pregnant. Most companies will not approve a policy for a woman who is already pregnant.
5. An Emergency Fund Can Cover Injuries and Time Away From Work
What would you do if the sole breadwinner in your household became seriously injured and needed to take a few months off work to recover? Or if one of you had a mental health crisis and needed to take a week or two off to reduce stress?
An emergency fund combined with a short-term disability insurance policy protects you in situations like these that you don't see coming. As careful as we are, we never know if one of the working people in our household will get in a car accident or break a leg skiing.
Being able to take some time off work without the financial threat looming always makes unfortunate news so much easier to bear.
6. An Emergency Fund Gives You Security
The last reason to start an emergency fund today is for the sake of security. There are so many more opportunities you can say yes to in life when you aren't living paycheck to paycheck. Want to start a business? Go for it. Ready to have another baby? Bring it on! Thinking about making a career change? You can do that.
What many of us don't realize is that there are opportunities everywhere, but we often have to say no when we are relying on the security of our paycheck. Having an emergency fund to back you up gives you the chance to say yes to exciting new opportunities that come along in life.
Why should creating an emergency fund be a top priority? Life is simply a bit safer and more fun when you aren’t riding the edge between chaos and stability.
Here are some of the best reasons to start your emergency fund right away:
You'll Need An Emergency Fund Before You Can Buy A Home
Be Prepared For A Job Loss or Pay Cut
You May Need Extra Savings When You Have A Baby
Cover the Gap Between Short-Term Disability Pay and Your Salary
An Emergency Fund Can Cover Injuries and Time Away From Work
An Emergency Fund Gives You Security
How Women Are Reaching Financial Freedom Faster Than Ever
Have you dreamed of becoming financially free... this year? This 7 day free guided challenge is your one stop shop for completely making over your money in a fun, exciting way. Join hundreds of other women now by signing up for the Makeover Your Money challenge!