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The importance of having an emergency fund

Finance 101

Arial view of a boat anchored in the ocean on the coast of a pink sand beach

Along with exceptional life moments, we occasionally face unexpected events that can take a hard hit on our bank accounts. 

Whether it’s a sudden job loss, getting into a car accident or having your refrigerator decide it doesn’t want to work anymore, unforeseen situations arise with the potential to leave you in a tough spot financially. While we all may know that being financially prepared for the unexpected is what’s responsible, the fact is, 23% of Americans today haven’t saved a cent for emergencies.1 Maybe it’s because they’ve never heard of the concept of an emergency fund or maybe it’s because they’ve never been told just how very important it is to have one. Either way, don’t worry – we’re going to cover both!
 

Being financially prepared for emergency situations, large or small, can help alleviate anxiety and prevent stress when times get tough. In the financial industry, we refer to such emergency savings as an emergency fund.  An emergency fund is simply a stash of money that’s been set aside to cover the surprise financial costs that life will inevitably throw your way.
 

How much should you have saved in an emergency fund? The general consensus is that you should have three to six months’ worth of your salary sitting pretty in your emergency fund. The account should be easily accessible, which in most cases means it should be saved in cash, not invested. For most people, setting this kind of money aside isn’t doable right away, but it should be made a priority and contributing even $20 a week is a great start. Of course, the ease of saving will vary based on your financial situation, habits and your perception of the value of money. Whether you are a saver or spender, a risk averse or aggressive, what’s important is that you’re prepared when the unexpected arises.
 

Once you have an emergency fund, the hardest and most important part is to restrain yourself from using your savings on day-to-day wants and needs. The money put aside should not be used for a new TV that’s on sale (not an emergency) or a new phone that was just released (also, not an emergency). Be strong! You’ll most likely find that once you have the savings, knowing you’re prepared is a great wellness booster and well worth the peace of mind.
 

Some people consider various types of insurance as their “emergency backup funds,” but keep in mind that insurance claims can take a long time to process and will often not cover all of your needs. Having different types of insurance and an emergency fund can maximize your protection. Making sure you have both options in place will allow you to focus on your big picture goals and not sweat the smaller stuff.
 

Everyone is on their own financial journey with their own unique goals to achieve and hardships to conquer. Don’t let an emergency get in the way of your progress. Use the government shut down as a catalyst for motivation and start the year off strong by setting up an emergency fund for yourself. Whether you’re stashing twenties under the mattress, making contributions to a bank savings account, or leveraging a savings app, there’s no wrong way to get started saving.  



Citations:

1 https://www.cnbc.com/2018/07/02/about-55-million-americans-have-no-emergency-savings.html

Please note: Financial advice should be tailored to individual circumstances and the content of this article should not be viewed as recommendations. This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. It is intended to promote awareness and is for educational purposes only. The specific applications and services noted are not necessarily endorsed by John Hancock or any of its affiliated businesses.

Advisory services offered through John Hancock Personal Financial Services, LLC, an SEC Registered Investment Adviser. Boston, MA 02210. 888-955-5432.

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