3 serious risks of not having enough emergency funds

There is wide agreement among experts that one of the first big financial steps you should take is to start an emergency fund. Before you focus on investing or paying off debt, save at least $500 to $1,000 for emergencies. In the long term, aim to have three to six months worth of living expenses in your emergency fund.

Not everyone does this. Case in point: the median savings account balance is just $1,200, far short of three to six months’ worth of living expenses for most people. Let’s be honest: Growing your emergency savings can be a pain and not the most fun part of managing your personal money. It’s understandable to be interested in saving up to buy a home or investing to grow your money.

That doesn’t mean it’s a good idea. Because if you don’t have enough of an emergency fund, you’ll be in serious financial trouble.

1. Borrow money to cover emergency expenses

Imagine the worst-case scenario: losing your job or receiving an unexpected $5,000 bill. If you have a large emergency fund, you can withdraw money to cover your expenses. Still not fun, but at least I was prepared.

What if I don’t have enough money saved? Having to pay your bills means you have to borrow money from somewhere. It could mean any of the following:

• Grow your credit card balance with an average interest rate of 21.47%.
• Take out a personal loan — The average interest rate for a 24-month personal loan is 12.35%.

Interest rates are high, so you could end up paying a lot of money in interest.

If you’re in a pinch, there are credit cards with at least 0% introductory APR. Some have introductory periods of 15 months or more and don’t charge interest. However, you usually need a high credit score to qualify. You’ll also still end up in debt, and once the introductory period ends, your 0% APR will jump up to the card’s regular rate.

2. I can’t pay with my account

Borrowing money can help you get through an emergency, but it is not a long-term solution. In fact, adding debt payments to your monthly bills can make it even harder to recover financially. Money borrowed on loans or credit cards must be repaid.

Let’s say you’re living within your paycheck. I spend $4,000 a month in take-home pay. Unfortunately, it will cost him $5,000 in car repairs and hospital bills. To pay it back, he takes out a 24-month personal loan with an interest rate of 13%. I have taken care of the immediate issue, but I now have $238 in monthly mortgage payments remaining.

Hopefully I can pay all my bills. But eventually, you may not be able to make the monthly payments you need. If you have a credit card or loan, you’ll likely be charged late fees, putting you further into debt. There are other ways to seriously damage your finances.

3. Damage to your credit score

If you miss a payment on your account, it will be recorded on your credit history. This won’t happen right away. Your account must be at least 30 days past due. Delaying more than 30 days can seriously damage your credit score.

The exact amount depends on your credit history before the late payment. For consumers with excellent credit, one late payment can cause your credit score to drop by up to 110 points. Things get even worse if the account becomes past due on his 60 and 90 days and the creditor ultimately decides to write off the account and send it to collections.

If this happens, it could take a long time to rebuild your credit. Late or canceled payments will remain on your credit file for seven years. It doesn’t take long to have good credit again, but the process can take several years.

A strong emergency fund is a must

An emergency fund is critical to being financially secure. If you don’t already have one, or at least three months’ worth of living expenses, make it a priority for 2024.

Calculate how much you can save each month for your emergency fund. Then set up an automatic transfer of that amount to your savings. Use a high-yield savings account for your emergency fund as well to get competitive interest rates.

Building an emergency fund will take time, but you’ll be glad you did. You’ll have peace of mind knowing you’re always ready.

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