When most people determine an ideal amount of money to save in an emergency fund, they think about a specific dollar amount that sounds like a decent sum. For example, some people may reach their desired comfort level at $1,000 or $2,500 in a savings account. Others may have heard that they need enough money to pay for their expenses for three or six months. However, an emergency fund may be used for very specific purposes. It makes sense to plan ahead for likely scenarios that may require you to dip into the fund. By doing so, you can ensure that you are well-prepared to pay for related expenses.
Auto, health, and home or renters’ insurance are common coverage types that people purchase to decrease out-of-pocket expense when an emergency situation develops. However, you typically need to pay your policy’s deductible when filing a claim. It makes sense to save enough money to pay for all of your deductibles at once. Some home and health insurance deductibles are very high, so you may need more money available in an emergency fund than you initially thought. An alternative is to adjust your coverage so that your deductible amounts are lower.
Home damage can and will occur, and many repair costs can be pricey. You may need septic service or HVAC repairs. Roofing services, appliance repairs or replacements and more are also common. Purchasing a home warranty is a reasonable way to keep some repair costs down, but you should have a sizable fund to pay for any out-of-pocket expenses as well.
Time Away from Work
You may have already saved money based on having to take a few months off of work, such as if you are laid off. However, you may also have to take time off of work to deal with serious home repairs, a car accident, an illness that generates medical bills and more. Your emergency fund should provide cash to pay for insurance deductibles, home repairs and loss of income all at the same time.
You can see that your emergency savings account may not be as well-funded as you thought. If you discover that you need thousands of dollars in an emergency fund, consider finding an account that has a high interest rate. A money market account or even a CD ladder with short-term CDs could be used for some of your cash as well. This will ensure that you get at least a modest return on your funds.