When is having a pile of cash on hand not a good thing? Pretty much never, unless you're in a dark alley surrounded by armed robbers. But even in that circumstance, the pile of cash could help you get away with your life.
While you probably already know that you need that pile of cash in the form of a rainy day fund, a contingency fund, walking-out-the-door money — whatever you want to call it — there's a good chance you don't have it. A recent survey showed that nearly 40% of Americans don't have enough money saved to carry them through an emergency, even something as small as an unexpected auto repair.
It's when the big things happen — the catastrophes and near-catastrophes that occur in life — when having enough savings can keep your world from crashing down around you, or at least feeling like it is.
If you don't already have an emergency fund, the most important thing is to make it happen and make it happen as soon as possible so you can at least have some financial control over your situation and don't have to resort to desperate measures.
"Having a contingency fund gives us options," Amanda Clayman, a financial therapist, said. "Money in a big sense gives us options, and there are a lot of pieces of our lives and our financial lives that are not going to be predictable, so we need to have as many options as possible in those circumstances so we can make choices about how we're going to respond."
Here's a look at eight scenarios where a pile of cash can really save the day.
1. You're in an Abusive Relationship
The important aspect of having a contingency fund in this situation is that you have money that's under your control, Clayman said. Physical, verbal and financial abuse can often go hand in hand, so keeping your finances as your own can be important.
"A key red flag for financially abusive situations is that the abuser tries to control all sources of your money — your income, your assets, your credit — they may even try to trash your credit," Clayman said. "So you need to make sure you remain in control of all of those resources at all times."
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2. You're a Victim of Identity Theft
Identity theft can totally screw up your financial life. For years, potentially. While you can freeze your credit reports, change credit card numbers and report it to the authorities, you still could be working from a cash-only basis for a while. Unless you're good and liquid, that can be a huge financial burden.
"We take for granted how credit makes our lives easy, like when renting a car," Clayman said. "If all of a sudden you need to put that type of expense on your debit card, they're going to place a hold on your account — it's usually three or four times whatever the anticipated cost of that expense is, so that's an amount you'd need to have liquid in your bank account."
3. You or a Loved One Has a Major Health Crisis
If you or a loved one gets a major medical diagnosis, it can be life altering and highly stressful. There is the adjustment to your "new normal," trying to understand what medical treatments will be needed, assessing the possibility of lost wages, healthcare assistance costs, etc.
"Having money in the bank allows you the mental and emotional space to simply adjust to what the primary health concern is going to be," Clayman said. "It's much harder to do that when you're also adding financial stress and vulnerability to the picture. There's lots of evidence that suggests financial stress can exacerbate any type of health concern."
4. You Have the Boss From Hell
"Having the freedom to leave a toxic situation is just something that is fundamentally good for all people," Clayman said.
While most financial experts suggest having at least three to six months of living expenses available in an emergency fund to provide just that kind of freedom, Clayman said that number can be daunting if you're starting from zero.
"Instead of focusing on time, start with incrementally smaller goals," she said. "Make your first goal $1,000 … and build up, absolutely, to three to six months."
5. You Lose Your Job
Unemployment is a financial setback, but it doesn't have to be disastrous, especially if you have an emergency fund. While there are safety nets like unemployment, and options like part-time jobs, and living off your credit cards (which should be avoided, when possible), having enough money on hand to pay the bills while you look for new work can have a huge impact on your day-to-day outlook and ability to focus on finding your next job opportunity.
6. You're a Victim of a Natural Disaster
"When we have a shock, when something just comes out of the blue, it takes some mental and emotional catchup work to really take it in and deal with it," Clayman said. "Our brains and bodies are mostly setup to deal within a particular status quo."
It's this kind of situation where lack of financial preparation can lead to serious life setbacks, including long-term homelessness.
Clayman, who has worked with trauma victims, including some who were displaced by Hurricane Katrina, said a lack of money in these circumstances "adds a sort of traumatic multiplier, if you will. It can affect how you're practically able to deal with the situation."
Living below your means is key, Clayman said. "In order to do that, we have to be aware of two things: how much money we have coming in … and how much it costs to be us," she said.
7. Your Spouse Dies
Having insurance, making sure you have access to your spouse's accounts, including passwords, PINs and other pertinent information is key beyond having an emergency fund, Clayman said.
"Making sure you have access to enough money to cover the day-to-day expenses for say, six months — you just want to be able to not have this awful loss and trauma exacerbated by any disruption in your general financial life.
It can take a long time to set up things like survivor benefits through Social Security, she said. "So the more you can do to keep your financial wheels turning, the better."
8. The Unknown
The bottom line is, life is full of surprises and the only thing you can really control are your personal choices. Choosing to create a savings account for those surprises by making changes in your spending or even taking a second job can put you in a position of power when it comes to dealing with them.
"It's valuable in all these underestimated ways, big and small," Clayman said. "Even if you're a shift worker, having a contingency fund can mean even if you get the flu, you're still able to pay your rent that month. So much of life is outside of our control … setting aside this money allows us to deal with the curveballs life throws at us … and take care of ourselves."
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