Living paycheck to paycheck leads to piling debt on top of debt when emergencies happen. Not being financially ready for unexpected expenses is a surefire way to limit what you can do with your future income because of how much debt and interest you have to repay each month.
In the most recent Financial Industry Regulation Foundation Study, 50 percent of Americans said they find covering expenses and paying bills difficult and 50 percent also said they don’t have emergency funds. If neither of those describe you then congratulations.
Add to that group the number of Americans who said they only pay the minimum on their credit card debt (32%), have experienced a drop in income over the past 12 months (22%), have unpaid medical bills (21%) and spend more than their income (18%).
The Federal Reserve Board found that 47 percent of Americans would have to use credit, sell something or wouldn’t be able to come up with $400 for an emergency.
Being prepared for a financial emergency means having your finances in order. The basic principles include:
- eliminating debt
- saving money
- living within your means.
Part of living within your means requires you to have money saved for periodic expenses. If you only budget for bills you pay once a month, you won’t have money ready for the bills that come every six months or every year. Those periodic expenses can be a cause of breaking the budget every time you have to pay for car repairs, registration or other bills that tend to come intermittently to say nothing of emergencies.
An emergency fund is important because all sorts of things can happen that will put a dent in your finances if you don’t have the money to cover it. You’ll either be using the savings you already have or you’ll be adding to your debt.
Here are five scenarios to prepare for based on the average costs of unexpected expenses.
1. Medical Expenses
There are certainly different levels of medical care and the cost varies depending on insurance and other details. Even so, adding a prescription that you’ll take regularly costs on average $84 a month. The average ambulance ride will put you back $500 and a night in the hospital runs you $1,878 on average. If you need outpatient surgery, that’s $4,552 on average and anything else you can think of probably increases the cost.
You can’t avoid medical expenses, but you can plan for them with a good insurance policy and by taking advantage of free preventive visits to be as healthy as possible.
Even with unemployment currently below 5 percent, the average unemployment still lasts 26 weeks or about six months. Do you have six months’ income saved up? Saving six months’ income is a lofty goal, but another good starting point is saving up enough to make up the difference between the job you can find tomorrow and the job you currently have today. Could you make your savings last with only the bills you absolutely have to pay until you found a job that paid equally to the one you have now?
3. Home repairs
Depending on what needs fixing you’re looking at between $2,000 to $6,000 whether it’s replacing carpet or putting new shingles on the roof. If you’re not ready for the added expense, you’ll be financing that cost and increasing how much the repairs cost in the long run.
4. Car Repairs
There’s always something that needs to be fixed on your car. At the very least oil needs changing and tires need to be rotated on a fairly regular basis. The average repair outside of scheduled maintenance averages $390. The 10 most common needed repairs when your “check engine light” comes on average $440. Some things you can plan for and others just go out, but having money saved for needed car repairs will always have you ready to avoid taking on debt.
5. Insurance Deductibles
Even when you have insurance, the unexpected can still cost you more than you have in your checking account. The average homeowner’s insurance deductible is $1,200. Get in a car accident and the average deductible is $650. Covering all of your healthcare costs until you reach your deductible costs you on average $1,300 before the insurance company starts picking up the tab or even just 80 percent of it. For health insurance, find out how much your out-of-pocket maximum is. That can give you a pretty good idea of how much you would need if something catastrophic happened.
Using any of those amounts is a good starting point for putting together an emergency fund. A nice round $1,000 would do it as well. If you already have a fund started, set a goal to add to it, so you’re prepared for even more.
If debt is preventing you from saving money, take advantage of our free debt analysis that will help show you how quickly you can pay off your debt and prioritize savings and your financial goals.