Money Talks, So Should You

Q&A: Why do you need an emergency fund?

Steve Doster
by Steve Doster, The Garrett Network  (@dosterfinancial)

The Nordstrom’s Anniversary Sale always seems to sneak up on us. Having an emergency fund makes sure we have available cash to fund our impulse buying spree! Ok, maybe that’s what we want to use it for, but you can’t.

An emergency fund is your insurance policy to stay out of credit card debt. It should equal three to six months of critical living expenses.

Life happens to all of us and unexpected emergencies pop up at the most inconvenient times. In fact, they occur with such regularity that we can expect to have the unexpected happen.

SLIDESHOW: Is it worth it? To spend or not to spend

Your car needs a $500 repair. Gotta have the car to get to work. If you don’t have an emergency fund, then you pay with a credit card. Now you’re at dinner with friends and short on cash. You decide to charge it. You think to yourself “Heck, I already have a $500 balance and the minimum payment is only $10 per month. Charging $50 bucks more isn’t gonna make a difference.” A $1,000 of charges later you have a credit card balance that’ll take months to pay off.

This is how the evil slide into credit card debt begins. And it’s all because you didn’t have an emergency fund to pay for those car repairs. That’s just one example.

Here are some other examples of where an emergency fund comes in to save the day:
• Lose your job and need to pay the rent and buy food.
• Death in the family and have to buy a last-minute plane ticket home.
• The cat or dog gets sick requiring a trip to the vet.
• Smash your hand or tweak your back doing chores around the home and can’t work.

Think of some good examples? Feel free to share with everyone in the Comment section!

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Steve is president and founder of Doster Financial Planning, a commission-free firm based on San Diego, CA. He is a CERTIFIED FINANCIAL PLANNER™ professional with an MBA fom Arizona State University and a BS in mechanical engineering from the University of Arizona. Steve is proud to say he doesn’t sell financial products or earn commissions on the advice he provides to clients. His primary goal is to educate people to understand and select the best ways to achieve their unique financial future.