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A financial emergency is any situation that you didn’t anticipate or plan for that affects you financially. Examples of financial emergencies can include a job loss, an unexpected car repair, or medical bills resulting from an accidental injury.
Six out of 10 American households experience at least one financial emergency per year, according to the Federal Emergency Management Agency (FEMA). Financial experts recommend planning ahead for life’s curveballs by having an emergency fund.
Knowing what is a financial emergency, and what isn’t, can help you decide when it makes sense to tap into your cash reserves or turn to credit to cover the gap.
Key Points
• A financial emergency is an unplanned situation that affects you financially.
• Necessary home repairs, car repairs, loss of income, and health issues are common financial emergencies.
• Vacations, weddings, gifts, and down payments are not typically considered financial emergencies.
• Setting aside an emergency fund can be useful should the unexpected financial emergency arise.
• A good rule of thumb is to have at least three to six months’ worth of expenses in your emergency fund.
What Is Considered a Financial Emergency?
FEMA defines a financial emergency as “any expense or loss of income you do not plan for.” There are a number of different scenarios that could fit the definition of a financial emergency, which is why it’s a good idea to make sure you have enough money in your bank account to cover them, if possible.
Here are some of the most common financial emergencies a typical household may encounter that could cause financial hardship.
Home Emergencies or Repairs
In addition to the regular costs of home ownership, it’s also important to be prepared for unexpected expenses that may crop up from time to time. For example, you may need to replace your HVAC system if it stops working or get a new roof if it springs an unfixable leak. Other financial emergencies examples include appliance repairs or the need to pay your deductible if you have to file a homeowners insurance claim for damages.
Car Emergencies or Repairs
If you own at least one vehicle for long enough, odds are that you’ll have a financial emergency at some point. Your transmission might give out, for example, or you may find out that you need to replace all four tires for your car to pass inspection. These are costs that you may not plan for but need to pay to keep your car on the road.
Loss of Income
There are different scenarios where a loss of income might constitute a financial emergency. If you’re the sole breadwinner in your household, for instance, and you get laid off, quit, or can’t work because of an illness or injury, this situation can directly impact your ability to pay the bills.
Emergencies That Affect Your Health
A health issue, major or minor, could end up being a financial emergency if it affects your ability to collect a paycheck. This kind of situation may also trigger a money emergency if you have to pay for some or all of your medical care out of pocket. Health insurance may pay for some of your care if you get sick or injured, but it doesn’t always cover all of your costs. And a financial emergency of this nature can become worse if you’re unable to work.
Unexpected Loss of a Loved One
Losing a loved one can be upsetting enough on its own, but it can also create financial pressure. If you need to travel to attend the funeral or you’re expected to contribute to final expenses, you may find yourself in a financial emergency.
Natural Disasters
Storms, droughts, floods, and earthquakes seem to be in the news more frequently these days. Any one of these events can disrupt your life and lead to loss of income or unexpected expenses. If a huge storm floods your town, your home might suffer damage and, even if you’re insured, other expenses could quickly pile up. Also, if your place of business were to be flooded, you might be out of work and therefore out of income for a while.
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What Is Not Considered a Financial Emergency?
Now you know what a financial emergency is. However, there are some things you might spend money on that don’t meet the strict definition of an emergency. Here are some examples of the kinds of situations that may feel necessary or urgent but aren’t actually financial emergencies.
Taking a Vacation
A vacation might feel like a “need,” especially if you could use some time away from a stressful job. But vacations are not generally considered to be examples of financial emergencies because they are not unexpected. Instead, you can plan and save for a trip at a pace that works for your budget.
Going to or Planning a Wedding
Being a guest at a wedding is optional, though you may feel social pressure to RSVP that you’ll be there. The costs of attending can add up once you factor in gifts, new clothes to wear to the event, and other expenses. Still, those are not financial emergencies since you can always decide not to go. Likewise, the cost of your own wedding is not a financial emergency because you can plan and save for it.
Purchasing Gifts for Someone
Birthdays, holidays, graduations, and other special occasions might involve presenting someone with a gift. But a gift is not classified as a financial emergency since you usually have some advance notice that an occasion is coming up. Plus, it’s up to you how much you spend. While you might want to purchase something lavish, a more affordable gift (like a book or gift card or taking the person out for coffee or a drink) or a simple heartfelt card can suffice when money is tight.
Putting Down a Down Payment
If you plan to buy a car or a home, putting money down can reduce the amount you need to finance. This will then save you money on interest over the life of the loan. Down payments are money that you save over time, not funds that you have to come up with on short notice. Though it may feel like an emergency when you find your dream house but haven’t yet saved enough money to buy it, this doesn’t meet the definition of a true financial emergency.
Replacing Items in the House That Are Not Essential
There are some things in your home that you may need to replace right away, especially if they break down. That includes HVAC systems and roofs that fail to do their jobs. As mentioned above, these common home repair costs can indeed qualify as financial emergencies. But other household expenditures, like new kitchen countertops or furniture, are items you can budget and save for, so they’re not financial emergencies.
Recommended: Ensure you’re prepared for the unexpected by using our emergency fund calculator.
Determining How Much Emergency Savings to Have
The financial emergency examples listed above underscore why having an emergency fund is important. When you have ample emergency savings in place, it helps you handle unexpected expenses without stress and without having to use high-interest credit cards or loans to pay for them.
So if you’re thinking, “Should I have an emergency fund?”, the answer is almost always going to be yes. The next question to tackle is how much to save.
One common rule of thumb is to have at least three to six months’ worth of expenses in your emergency fund. So if your monthly expenses are $3,000, you’d aim to save $9,000-$18,000 for an emergency fund. An emergency fund of that size in a savings account should, in theory, be able to get you through a financial crisis.
Whether that amount is too high or too low will depend on several things. A few examples of important factors: the types of financial emergencies you’re most likely to encounter, how much you’d be able to cut expenses if you had to, and how quickly you’d be able to replace lost income should the need arise.
In the case of something like a job loss, for example, a smaller emergency fund might be sufficient if you can live leanly and no one else depends on you financially. Or you’ll likely be okay if you can quickly find a replacement job and have one or more side hustles to supplement your income. On the other hand, if you’re married with three kids, a much larger emergency fund might be needed to sustain your family until you can find another job.
The Takeaway
An emergency fund can save the day when a true financial emergency comes along. Knowing the difference between what is a financial emergency and what is not and when to use an emergency fund can help you make the most of the money you’re saving.
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FAQ
What are some real-life examples of financial emergencies?
Real-life examples of financial emergencies include an unexpected job loss, an illness or injury that prevents you from working, or an unplanned home repair. A financial emergency may be a one-time expense, like a car repair, or an ongoing situation that requires you to rely on your savings to cover expenses.
Why might I need an emergency fund?
Having an emergency fund is a good idea if you own a home or vehicle, have concerns about what might happen if you were to lose your job, or simply don’t want to be caught unprepared when an unexpected expense comes along. You may also want to have an emergency fund if other people (such as your partner, spouse, or children) depend on you for income.
Is it recommended that I build an emergency fund?
Yes, it is generally recommended that most people have some type of emergency fund in place to cover unanticipated expenses. Going without an emergency fund may only make sense for people who have already accumulated substantial savings or investments they can draw on to cover unplanned events.
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