You hear about emergency savings all the time. You should put away money for emergencies. And since people so often say that you should try to save three to six months worth of expenses, it naturally follows that emergency savings must be to pay for what you need in case you lose your job, right?
Yes, if you can manage to put away six months worth of expenses, you will be in a great place if you happen to lose your job. But let's be honest, for most of us, saving up six months worth of expenses is a huge task, one that doesn't even seem possible. That leads people to think "Why bother saving anything?"
You should save because emergency savings isn't just for paying for your life if you lose your job. In fact, that's a very unlikely reason to need emergency savings. Most likely, some other type of emergency will come up, such as:
- Your car breaks down or you get in a minor accident
- A window breaks in your house during a storm
- You get sick and your insurance won't fully cover the best medication to treat the illness
- The boots you're required to wear for work that are supposed to be indestructible are no match for your friend's new dog
- You discover that a family of squirrels is squatting in your attic
- You discover a water leak in your house (I can tell you all about this one from personal experience)
Now that's a wide variety of emergencies. Some of those things need to be taken care of immediately, others can probably wait. After all, you don't absolutely need to evict those squirrels right away. But the longer they nest, the more they will destroy, plus you don't know what sorts of diseases they might be carrying. The longer they're in the house, the more expensive the repairs will be.
Some of those emergencies are pretty small. You can get a new pair of work boots for under $50. But your budget doesn't have $50 in it. You can put it on your credit card, but you don't want to be accruing more interest. Suddenly those reasonably priced boots become less reasonably priced. But if you have money in emergency savings you can cover those boots without destroying your budget.
Let's say you've been working on your emergency savings for only a short time, and you only have $25 in it. It won't cover your boots, but it will get you halfway there, and finding $25 in your budget is easier than finding $50.
So what does that mean? Your emergency savings doesn't have to be six months worth of expenses. It should be whatever you can make it. If you can only set aside $10 a month, at the end of a year, you've got $120. It's a start, and can help you when those little emergencies pop up.
I've been lucky and haven't had to use my emergency savings much over the past few years. Unfortunately, I managed to completely empty it thanks to the water damage in my house. It was an undetected slow leak that started well before I bought my house (and was concealed by the seller - but that's one of the things you risk as a buyer). Slow leaks aren't covered by insurance, unfortunately, so all of the repairs were my financial responsibility. I had to use all of my emergency savings and also most of my "fun" savings. So now I'm back to replenishing those accounts. It's going to be slow going, but I'm going to do my best to keep my expenses low and see how much I can put away.