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Managed to Amass an Emergency Expense Fund? Congratulations! Here’s How to Keep It

Piggy bank - How to keep your emergency fund

If you’ve succeeded in setting aside a chunk of change to cover those inevitable-yet-unexpected “expense shocks,” congratulations! You’re doing better than most.

According to the Federal Reserve Board’s Survey of Household Economics and Decision Making (SHED), barely half of Americans have an extra $400 at their disposal the event of, say, a car repair or medical bill. Some 30% report that they would have to go into debt or sell something to pay a $400 bill. And nearly 15% said they could not pay it at all. [p. 7]

So pat yourself on the back if you can face an unexpected expense without a spiking heartrate (and credit card balance)!

But what about unexpected job loss?

Now, if you haven’t managed to save enough to keep your household afloat should you find yourself unemployed, well, you’re not alone. Nearly half of all respondents to FINRA’s most recent National Financial Capability Study said they have not set aside the recommended 3 months of expenses in the case of job loss or other financial emergency. [p.13] For people living pay-check-to-paycheck, it’s a big undertaking to put away a fund of several thousand dollars—especially if you’re also making monthly contributions to a retirement account.

That’s where income loss insurance comes in.

For those without months’ of salary in savings, income loss insurance is one way to improve your sense of financial security, says Professor J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin–Madison.

For one, he says, insurance can provide immediate relief while you are first starting the savings process because you know you’ll have a safety net should you lose your job unexpectedly.

But even after you’ve amassed an emergency expense fund, income loss insurance can continue to secure your financial wellbeing. “After all,” Collins reasons, “one of the features of a shortfall fund is that you are going to have to spend it eventually. And when that happens, you’ll be back down to zero again.”

With income loss insurance “you can use your savings to pay those medical bills and car repairs when they come around but still know you have the insurance in the case of income loss while you build your savings back up.”

Fluctuating savings accounts—like the emergencies they’re used for—are just a fact of life. But when you feel like you can set financial goals and keep them—in this case, building that emergency fund back up even in the face of unexpected income loss—you know you’re on your way to financial wellbeing.