Life planning involves making plans for your future, and financial planning is a major part of the process. Financial planning includes setting up investments, planning your retirement, and starting an emergency fund. An emergency fund gives you a safety net that provides a sense of financial security. At a minimum, an emergency fund should have enough money to cover six months’ of living expenses. Additionally, you should have extra cash saved for emergency events, such a car repair.
In 2016, the average time an individual remained unemployed after losing his or her job was 27.5 weeks, which is about six months. This is why financial experts recommend saving for six months’ of living expenses. Even if you were lucky enough to receive an offer from the first company to which you applied, the hiring process can sometimes take two or three months.
Consider that losing your job and needing to cover an unexpected repair, such as a broken dryer, is a possibility. Therefore, you should also have extra money saved on top of living expenses. While you could permanently lose your job and be forced to find a new one, you could also miss work short time or long term from an illness, injury, or disease.
Saving for insurance premiums and medical services you may need in retirement or during a short period of unemployment is important, but these aren’t the only healthcare costs for which you should be planning. While an unexpected bout of strep throat won’t necessarily require you to dip into your emergency funds to cover a doctor’s visit and an antibiotic, there are illness, diseases, and unexpected injuries that can cause your finances to take a big hit.
Illnesses and infections, such pneumonia or appendicitis, often require hospitalization. The latter can require surgery, which will prolong your hospital stay, resulting in more missed days from work and a hospital bill that runs around $1,500. Some people suffer a severe injury or receive an unexpected diagnosis of a disease that requires long hospital stays, frequent doctor visits, and expensive testing. Even if you have insurance coverage, it can get costly. Never mind the fact that you’re missing work on top of it all.
In addition to health care costs, home repairs and remodeling projects can also get costly. How much you should set aside for your home maintenance budget will depend on the value, size, age, and condition of your home, as well as where your house is located, the weather where you live, and type of property that you own. In general, try to have a sort of hybrid method of saving 1 percent of your home’s worth and $1 for every square foot you own. So a 1,500 square-foot home at $200,000 would need $1,750 annually. Also, add 10 percent to your savings total ($176 for the previous example) for each factor outside of size and costs (e.g., weather, condition, age, location, type).
The number you come up doesn’t represent the literal amount you’ll spend every year. Instead, it’s saying that over a span of 10 years or more, you’ll average this amount annually. Some years you’ll spend far less, and some years you’ll spend more. For example, you may spend $100 on paint one year, but the next year you may need a roof replacement, which can cost between $4,000 and $8,000.
Keep in mind that remodeling can add equity to your home. So while the cost of remodeling can get pricey, generally, the more expensive projects result in a bigger return. Take a kitchen remodel for example. The national average cost of remodeling a kitchen is near $19,000. However, it’s a remodel that can add equity to your home. In fact, it’s one of the highest return-on-investment (ROI) remodels with an ROI of nearly 83 percent.
There are many other costs that can arise, such as car repairs, preparing for a baby, and becoming a caregiver for a loved one. It’s impossible to be prepared for everything, but not having any money saved away is a poor financial decision. Remember that you can’t save it all up overnight. Just put away what you can each month, and overtime, the money will grow. Whenever you receive extra cash, like for a gift or tax refund, put that money into your emergency fund savings account. When an emergency arises, you’ll be glad you did.