It is commonly said that “an ounce of prevention is worth a pound of cure”, and according to a recent survey, only 45% of Americans would be able to pay for a $1,000 emergency without going into debt or taking out a loan(1). Here is a list of common home and auto emergency expenses(2)(3):
Average car repair: $600
Foundation repair on house: $2,000–$25,000
Electrical repair on house: $500–$2,000
Roof repair: $1,000–$8,000
Water damage: $2,500
Fixing old pipes: $500–$1,500
HVAC: $350–$4,500
Mold: $2,000
As you can see, only a few of the above cost less than $1,000. SoFi also notes that the average household spent $2,300 on emergency household repairs last year. We would encourage people to take a look at this list and compare it to their emergency fund (if they have one). See how important an emergency fund with 3-6 months on living expenses truly is? For instance, most Americans having to spend $2,300 on emergency repairs would have to put $1,300 on a credit card if they only had $1,000 in an emergency fund. If that credit card isn’t paid off right away, you will pay $30 per month on interest. That $1,300 will cost you $1,600 in less than a year.
So what is the solution? We (highly) recommend our clients save at least 3–6 months of living expenses in a high-yield-savings account earning a 4–5% return. For most people, this means having $15,000–$25,000 saved for an emergency. While this may seem like a lot of money, it is actually very attainable. Saving $250 a month will have a fully funded emergency fund in two years or less for most people. Some may say that $15,000 is a lot of money to have sitting around doing nothing. That money isn’t doing nothing, it is a hedge against the emergencies that life throws at us. Having this much money set aside gives you what no money can’t: peace of mind. For most, the worst financial emergency imaginable is losing a job. With a fully-funded emergency fund, someone wouldn’t have to accept the first offer that comes their way. They know that they are protected.
Proper emergency protection in a high-yield-savings account is the financial cornerstone that every person needs. Peace of mind cannot be bought, and the security an emergency fund provides is priceless.
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