You’re Still Not Ready for an Emergency

Japan became the latest victim of natural disasters.

Last weekend, a record amount of rainfall forced the evacuation of 270,000 people. Flooding on the island of Kyushu hit hard and fast, with death toll, as we write, at 40. Thousands remain trapped and rescue crews are working hard to get people to safety.

Here in the U.S., we’re dealing with the tail end of tornado season. We’ve already had three confirmed twisters in July. And soon it’ll be hurricane season.

But if you’re like most Americans, you’re not prepared for any kind of emergency… likely even less so in the wake of the COVID-19 crisis.

As my assistant Laura found out two years ago, filing an insurance claim for storm damage is fraught with difficulties and headaches. After a storm tore the siding off of her house, she realized her insurance wouldn’t pay for anything… because of her deductible.

Fortunately, Laura had an emergency fund to lean on for exactly these kinds of unexpected bills… She didn’t need to put emergency expenses on a credit card or borrow against her home’s equity.

But most of America doesn’t have enough cash on hand to cover this type of emergency… something we’ve warned about for years.

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In 2019, 69% of Americans reported only having $1,000 or less in savings. That’s worrisome, particularly with the issues we’ve faced so far in 2020 – prolonged unemployment, cuts to hours, and a market crash in February and March.

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 HomeAdvisor.com, some of the most common repairs can add up to thousands of dollars…

For example, small roof repairs run a few hundred dollars. However, costs for replacing an entire roof can be anywhere from $5,000 to $10,000. Similarly, fixing an air-conditioning unit or furnace typically runs about $300, but a full replacement is anywhere from $4,000 to $7,000.

So it’s important to 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.

And for 2020 Medicare, the Part A deductible is $1,408 and the Part B annual deductible is $144.60.

If a sudden accident or illness hits you or one of your family members, can you afford to cover the associated costs? If you’re still working, a good solution for this is to open a health savings account (“HSA”). 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, make sure to maintain it and change the allocation as your needs change.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
July 7, 2020