Financial emergencies are not always caused by something as dramatic as a natural disaster or a serious illness. In fact, they are usually triggered by events that seem so run-of-the mill that they won't earn you much in the way of sympathy. For that reason, you need to be prepared for these more ordinary events, because you may find help from others hard to come by. Failing to prepare for these events can be costly. With savings account interest rates so low these days, it may seem there is little incentive to keep an extra cushion in your savings account, but think of it this way: Having an emergency reserve can help you avoid racking up credit card debt when an unexpected need arises. The Federal Reserve reports that the average credit card balance carries an interest rate of 13.22 percent, so keeping extra money in your savings account isn't merely a way to earn a percent or so on your savings; it is also a way of avoiding having to pay in excess of 13 percent if you suddenly need cash.
Potential financial calamitiesHere are six examples of ordinary events that can create a need for additional cash:
- Another year of college. Tuition costs have risen at three times the rate of inflation over the past 30 years, which has contributed to the accumulation of student loan debt in the U.S. reaching $1 trillion. Compound that with students who find it increasingly difficult to finish their degrees in four years, or who return to school rather than face a hostile job market, and anyone with children approaching college age may do well to budget a little extra for education.
- Car trouble. It can crop up at any time, and if getting to work depends on your car, fixing or replacing a broken vehicle is not a discretionary item. You can't predict when this kind of thing is going to happen, but you know it's going to happen eventually, so why not budget for it?
- Home repairs. The nature of many home repairs is that if you don't take care of them promptly, they can lead to more expensive problems.
- Unemployment. The Bureau of Labor Statistics reports that as of late 2012, the median stint of unemployment lasted 19 weeks, and 40 percent of unemployed persons were without a job for more than half a year. Unemployment benefits probably won't cover your expenses, so it can pay to have some extra reserves.
- Cut hours. Even if you don't lose your job, many employers are having to cut hours in the face of a slow business environment. Some extra savings can help you fill the resulting budget gap until things pick up.
- Higher insurance premiums. Insurance is a big-ticket item, and it is often subject to sudden rate increases. Any marks on your driving record are likely to boost your auto insurance premiums, while life insurance premiums are often designed to go up as you age, and health insurance premiums just seem to go up no matter what.