Why You Need $300 Emergency Fund

Joseph lives paycheck to paycheck.  His job at the supermarket barely pays enough to keep a roof over his head.  When our Bank On classes mentioned the need for emergency savings, he was the first to raise his hand and challenge the idea since there is virtually no money TO save.  Having a big emergency fund is great, and can protect you in the event of a job loss or some larger emergency, but the average emergency is in the area of $300 - $500.  That is just enough to make ends not meet for the month. 

Without an emergency fund, when Joseph encounters an unexpected expense like a flat tire or a doctors visit, he will have to use other sources to fund that need. Alternatives to the emergency fund might include:

  1. Credit Cards:  Many people use credit cards to fund the cost of unexpected expenses and make a plan to pay them off over time, but before they can get one emergency paid off, another happens.  The interest and the fees associated with the credit cards compound the cost of that unexpected expense. 
  2. Payday Advances:  Some employers have been known to offer their employees a payday advance.  That can help meet that immediate need, but when payday comes, there will still be the regular bills to pay and now not enough payday to pay those regular bills so the cycle continues.
  3. Payday Lenders:  For a small fee (about $15 - $20 per $100 borrowed) you can get a quick loan at the corner payday lender.  This like the payday advance will keep you in the cycle of debt as the loan comes due at the next payday cycle and that leaves little for you to meet your current needs.  Additionally, that annual percentage interest rate can be as much as 400% for that short loan you took out.  Where the lenders really make their money is when you renew your loan and pay another fee to extend your loan for a litte longer.  Both payday advances and payday loans do not report your payment to the credit bureau (except in circumstances of delinquency) so they don't help you build your credit.
  4. Family/Friend Borrowing:  With family and friends, while they may be willing to help you in a pinch, you will find that they are not as accomodating when you are not able to repay on time.  This can damage relationships and make Thanksgiving very tense.
  5. Charity:  There are charities to assist in a crisis, but the funds available from charity are minimal and they need to stretch their dollars over all the emergencies that come to their doors each month.  They may want to help you but not have the funds to give.
Our best defense is to give a priority to saving regularly.  If you can squeeze even a little into a savings account out of each payday and look to tax refunds and other windfalls to help boost that savings, you and Joseph can be in a better position when the next thing happens.  Things do happen to all of us don't they?

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