You're Not Ready for an Emergency

The wind gusted up to 70 miles per hour. But louder than the wind was the siding tearing off the front of my house...

For several days last March, a windstorm uprooted trees, pulled down powerlines, and caused massive damage to buildings across Maryland.

When the wind died down, I took a walk around my neighborhood, checking out the damage. One neighbor lost the side of their home. Another was forced out of their home when the roof collapsed.

Downed trees and powerlines made it nearly impossible to safely get into or out of the neighborhood.

My house was in better shape than most, but it still had enough damage that I knew I'd need to call my insurance company.

For the first time in my life, I learned the difficulties of filing an insurance claim.

After a month of back and forth, I finally got new siding... without my insurance company covering anything.

Thankfully, I have an emergency fund to lean on for exactly these kinds of unexpected bills... I don't need to put emergency expenses on a credit card or borrow against my home's equity.

But most of America doesn't have enough cash on hand to cover this type of emergency...

Around 60% of Americans don't have enough in savings to cover even a $500 emergency. And one survey found that around 80% can't cover a $1,000 emergency expense!

I can't stress enough the importance of an emergency fund.

If you look at your financial life as a house, an emergency fund should be the foundation. You want to make sure, in the event of an accident or job loss, you have the funds available to pay your expenses.

Typically, financial planners recommend having about three to six months' worth of take-home pay in your emergency fund. We've even seen some recommendations for as much as nine months' worth of pay saved.

Before deciding on how much is best for you, consider the following:

1. Am I single or married? If you're single with a reliable job, you don't need to save as much... But if you're married and only one partner has a job (even a reliable one), you should have more in savings. That's because in the event of a job loss, you'll have to pay bills for two folks instead of one. Married folks where both spouses have reliable jobs don't have as much of a risk.

2. What are my monthly expenses? If you don't know how much you spend per month, take time this week to sit down and figure it out. Include bills for your home (like rent or a mortgage, utilities, homeowners' association fees, property taxes, and insurance), as well as car payments, taxes, medical expenses, and living expenses (like groceries).

3. How secure is my job and how quickly could I find a new one? This one's tricky. Some fields hire regularly, but others might not. Networking is a great way to increase your visibility, and keeping in touch with connections will help if you ever need to find a new job. And although age discrimination is illegal, we know several folks 50 and older who had a lot of difficulty finding a new job due to their age and being "overqualified."

4. What assets could cause an unexpected cost? In addition to job loss, sudden problems like car or home repairs often require the use of an emergency fund.

According to travel giant AAA, the average car repair costs around $600. Some costs, like replacing the catalytic converter, run upwards of $1,000.

Home costs are often even worse. According to, some of the most common repairs can add up to thousands...

For example, small roof repairs run a few hundred dollars. However, costs for replacing an entire roof can be anywhere from $3,000 to $12,000. Similarly, fixing an air-conditioning unit or furnace typically runs about $300, but a full replacement is anywhere from $4,000 to $8,000.

One important step... understand exactly what your insurance will or will not cover. Likewise, know your warranty terms and how long they last. And keep up with regular care and maintenance to avoid bigger problems down the road.

5. Is my health in order? According to the Kaiser Family Foundation, the average family health insurance plan deductible is about $1,500. If a sudden accident or illness hits you or one of your family members, can you afford to cover the associated costs? A good solution for this is to open a health savings account (HSA)... something we covered here. If you aren't able to open an HSA, make sure to factor these costs into your emergency fund.

Finally, make sure that your emergency fund is kept in easy-to-access accounts. These include checking and savings accounts, certificates of deposit, and money market accounts. The idea is to be able to get the funds quickly with little or no penalty fees.

Online emergency-fund calculators can help, but make sure to use ones that account for all five of the above points. And we suggest using more than one and averaging the results. You can start with this one from NerdWallet, and this one from Practical Money Skills.

Once you calculate your emergency fund, you can start putting any leftover money to work in other investment accounts that can make you money.

Even if you can't start with much, an emergency fund is an important first step toward a solid financial foundation.

Have a great week,

Laura Bente & Amanda Cuocci
July 15, 2018