Many personal finance experts talk about how important it is to have an emergency savings fund. They emphasize how we’re all just one emergency away from financial disaster. Their warnings are for good reason, considering so many Americans are not great savers.
One in three American families say they have no emergency savings at all. This includes one in 10 households with an annual income of more than $100,000, according to research conducted by The Pew Charitable Trusts. In addition, among American households who do have savings, their funds are severely limited. Approximately 55% of low-income American households say they can only replace less than one month of their income through liquid savings. When it comes to the middle class, they can only replace roughly four months of income — and that’s after pooling all available resources such as retirement accounts and investments.
Although having cash readily available for emergencies is important, many fail to recognize the importance of another type of savings fund that’s just as important — an incidentals fund. This fund is designed to cover expenses that aren’t dire emergencies but are still important enough to require a timely resolution. This is the fund you withdraw from when you experience an unforeseen expense such as a replacement soccer uniform for your child or the need to book a hotel room for an unexpected trip out of town. Incidentals can wreck your budget just as much as an emergency, so this type of fund shouldn’t be overlooked.
Why bother creating an incidentals fund? We’re glad you asked. Read on to learn more about some of the benefits.
You’ll preserve your emergency cash
The incidentals fund is necessary because your cash cushion needs a cushion. It’s not enough to only have a fund for serious emergencies. One benefit of having an incidentals fund is you won’t be forced to tap your emergency savings. The danger in dipping into your emergency fund is that when you experience an event that is actually a real emergency, you’ll be short on cash. Non-emergencies can still negatively impact your budget, so it’s best to be prepared.
You’ll have less financial anxiety
Americans are so anxious about their money that most are losing sleep over it. A CreditCards.com survey finds 62% of Americans can’t sleep because of at least one money problem. When you have a fund for incidentals, you’ll breathe easier knowing that a random expense (Kitty swallowed yarn and needs to see the vet, for example) won’t derail your entire savings plan. This extra fund is so magical that it can put some of your money anxieties to rest.
You won’t blow your budget
Making a purchase you haven’t budgeted for can throw your finances off track. Depending on how much you spend, it can take weeks, or even months, to get your finances in order. A special fund just for incidentals will reduce your chances of spending beyond your monthly budget.
You’ll have less fights about money
One of the top reasons for marital discord is disagreements about money. When there’s an additional savings fund, you and your partner won’t have to argue about how to come up with the cash for minor incidents. This alone will help you have fewer arguments. And who doesn’t want to argue less with their significant other? This is enough reason to get started on your incidentals fund today.
You won’t have to rely on credit
Do you usually pull out the plastic whenever an unexpected expense comes up? Having money for incidentals will lessen your need to rely on credit cards for life’s little gotchas. Consequently, you’ll be able to keep your debt load as low as possible.