Did you know that an estimated 56% of Americans can’t cover a $1,000 emergency expense with savings? Whether it’s an unexpected car repair or damage from a natural disaster, financial emergencies can happen to anyone.
Knowing the types of potential emergencies and being prepared can help you avoid the high costs of unexpected expenses.
Keep reading to learn about seven common types of financial emergencies as well as some of the best ways to prepare for them. But first, let’s discuss what they are!
What are financial emergencies?
A financial emergency is any event that causes you to have an unexpected bill or expense. The key word is “unexpected.” A sudden expense is one you’re not planning for, which means it could have a bigger impact on your finances.
Financial emergencies are not large, planned expenses. For example, a wedding or vacation wouldn’t qualify as a financial emergency.
Generally, you’ll know well in advance how much money you want to spend on these events. This gives you time to plan and budget—reducing the effect on your finances.
In a financial emergency, you don’t usually have time to save up for the event.
7 Financial emergency examples
What types of unexpected events can put you into a financial emergency? In general, anything that creates a sudden financial bill or expense can be a financial emergency.
Here are seven financial emergency examples to help you understand.
1. Natural disasters
Natural disasters—like hurricanes, tornadoes, and wildfires—are some of the costliest financial emergencies.
According to data from the National Centers for Environmental Information, the estimated cost of major US natural disasters was recently over $152 billion in a year.
Much of these costs land on individuals, such as homeowners and residents of a region. Even with insurance, a natural disaster could cost you thousands of dollars.
For example, a tornado causes damage to your city and surrounding areas. The price of lumber, lodging, and cleanup services skyrockets because of low supply and high demand.
You’ll have to pay more to repair your home, find a temporary living space, and restore your belongings.
Some common costly natural disasters include:
- Hurricanes and tropical storms
- Severe winter storms, such as ice or heavy snowfall
2. Losing your job
A job loss is a common—and costly—financial emergency example. After losing your job, you suddenly find yourself without a steady income. This affects your immediate cash flow, as well as long-term planning.
In the short term, you won’t be bringing in a steady paycheck. You may worry about paying your rent or mortgage, car payments, or credit card bills.
In the long term, you may have to put off financial goals or planning.
For example, you wanted to buy a new car and were looking at car loans. When your employer downsizes, however, you lose your job. Without a regular income, it’s likely to be much more difficult to secure a loan.
A partner losing their job can also affect your financial situation. If your spouse or significant other is let go, you may have to cover more of the financial burden in your household. This tightens your overall household budget and could limit your financial goals.
3. Unexpected car repairs
Cars make it easy for you to travel where you need to go—when you need to get there. Unfortunately, these mechanical marvels as also known to break down over time. Sudden car repair bills are some of the most common financial emergencies.
For example, your car has a mechanical failure and won’t start. First, you’ll have a bill to tow the vehicle to a repair shop. Then, you’ll have to cover the cost of the mechanic.
Some issues, such as a blown engine, can cost over $5,000 to repair (on the cheap side!).
On the other hand, your car might be in great shape. However, one collision or car accident could cause expensive problems.
Car insurance may cover some of the costs, but it might not cover the full expense. You’ll also have to add in the cost of your car insurance deductible when calculating the cost of your repairs.
4. Medical emergency
Data from the Kaiser Family Foundation (KFF) highlights that around 41% of American adults have debt from medical or dental bills.
When a medical emergency strikes, however, the cost is probably the last thing on your mind. If you’re in an auto accident, for example, your injuries might need immediate medical attention.
Likewise, sudden, severe pain could warrant a trip to the emergency room—even if you know it will cost thousands.
I recently experienced a medical emergency (and the resulting financial emergency). I unexpectedly started feeling pain in my upper abdomen and went to the emergency room.
A few blood tests and a CT scan revealed issues with my gallbladder. The ER doctor recommended emergency surgery to remove it the next day.
The cost of an overnight ER stay, diagnostic tests, and major emergency surgery isn’t cheap. And since the pain came unexpectedly, I wasn’t planning for this major expense. Luckily, I have a well-funded Health Savings Account (HSA) to cover the costs.
Indirect costs of medical financial emergencies
While the financial cost of a doctor and hospital visits is obvious from the bill you receive in the mail, there are other costs associated with a medical emergency as well.
One of the biggest is the cost of lost wages or missed work. Depending on the medical emergency, you may have to be out of work for several days or even weeks. If you don’t have adequate paid time off or sick leave, you may lose wages during your recovery.
5. Sudden home expenses
Like car repairs, an unexpected home repair can be a major, unwelcome expense. Sudden home repairs can range from simple fixes to long-term construction projects. Some home financial emergency examples include:
- Roof damage or replacement
- Major home systems repairs, such as heating and cooling or plumbing damage
- Repairing or replacing broken appliances like dishwashers, ovens, and washing machines
- Repairing or refinishing exteriors, such as decks or siding
The cost of a home repair varies depending on what type of repairs you need.
A new HVAC unit, for example, is likely going to be more expensive than a new washing machine. A new roof, however, will probably be more than a new HVAC unit.
6. Death in the family
The unexpected passing of a family member isn’t just an emotional event. It often comes with unexpected expenses.
If you are a close relative, you may have to cover funeral or burial expenses. You’ll also have personal costs related to saying goodbye. For example, booking last-minute travel and securing lodging during the funeral.
Divorce is an often-overlooked financial emergency example. Even an uncontested divorce could cost thousands of dollars. The more complicated or messy the divorce, the more it will likely cost.
Divorces in America cost on average between $15,000 and $20,000 (though the median price is $7,000). However, much of the cost of a divorce depends on the relationship between spouses, the number of assets, children, and the state of filing.
Some states allow amicable couples to file their divorce on their own. Others require the service of a lawyer.
Long-term costs of divorce
Although divorce has immediate costs, such as legal fees, the long-term costs of divorce can also affect your finances.
When you split with a spouse, you’re often going from a dual-household income to a single income. You’ll have to cover everyday expenses on your own, like insurance and groceries.
Other long-term costs include traveling and car maintenance if you have children from your marriage.
You’ll likely have to meet up with your ex-spouse to drop off your children for visits. Your children may also struggle with the divorce and may need to work with a qualified therapist to help work through their feelings.
How to prepare for financial emergencies
What can you do to minimize the financial burden of a financial emergency? The best thing to do is to plan for the unexpected.
Preparing for a financial emergency can help you reduce the negative effects on your financial situation.
There are so many ways to prepare for emergencies—the process doesn’t have to be complicated. Let’s check out some of the best ways to prepare for unexpected expenses.
Build an emergency fund
An emergency fund is your primary line of defense against financial emergencies. Emergency savings can help you cover any kind of unexpected financial expense.
Having money readily available for the unexpected mean you won’t have to take out a loan or rack up credit card debt for unexpected bills.
It’s important to only use your emergency fund for emergencies. That means your unexpected expense is sudden and also necessary. You shouldn’t use an emergency fund to pay for things you want, like an expensive dinner or vacation.
Most emergency funds should be between 3 and 6 months’ worth of essential living expenses. This includes your mortgage or rent, debt payments (like a car loan or credit card debt), and insurance costs. You should also include the basic groceries and utilities you need to survive.
Keep emergency cash on hand
Your emergency cash fund should be kept in a liquid account. This means your money stays in cash, rather than getting invested in the stock market.
Invested funds take longer to access—it could take a couple of business days to sell your investments and cash out of your account. By keeping your emergency money in cash, you can quickly access it when needed.
While it’s important to have cash on hand, you shouldn’t try to keep your entire emergency savings hidden under your mattress. If something happens, like a fire or robbery, you’ll be out of your hard-earned savings.
Instead, plan to keep your emergency savings in an easy-to-access bank account. For example, you can use a savings account at the same bank as your checking account.
Most banks let you move money between accounts instantly. This lets you easily move money into your checking account if an emergency arises.
Invest in insurance
Insurance is one of the very best ways to safeguard yourself from financial emergencies. There are several different types of insurance to help protect your financial situation, including:
If you haven’t looked at your insurance coverage in a while, the best time to review it is now. Pull out your policies and go over what’s covered, and what’s not, and consider if you need additional types of coverage for your current situation.
A quick note on insurance deductibles
An insurance deductible is how much you have to pay out-of-pocket before your insurance covers damages. This varies greatly between types of insurance and even between policies.
For instance, your dental insurance deductible is $50. You go to the dentist for a procedure that costs $150. You pay the first $50, and your insurance covers the remaining $100.
Property insurance is one of the primary types of insurance coverage. It covers your belongings. Car insurance, renters, and homeowners insurance are all types of property coverage.
Generally, property insurance protects you in two ways: physical property and liability.
Physical property coverage helps pay for the repair or replacement of your things if they’re damaged in a covered accident.
For example, you accidentally back into a utility pole at the grocery store. Your car insurance has collision damage protection. Your car insurance company sends you a check to cover the repairs, minus your deductible.
Liability coverage protects you in the event of an accident where someone else (or their property) is harmed. If it turns out you are liable for the accident, you could face lawsuits or have to provide financial compensation for the other party.
Your liability insurance helps protect your finances if this happens. For example, a guest at your home trips over your children’s toys. They fall and break their wrist.
The guest might try to sue you for compensation, such as the cost of their medical bills. Liability coverage from your homeowners insurance should help cover the legal and medical costs.
Where property insurance protects your things, life insurance helps protect your family and loved ones. In case of your death, life insurance pays out a death benefit (the amount of your policy) to your listed loved ones.
This money can help pay for your final expenses, living expenses, and the cost for your family to maintain their lifestyle.
There are two types of life insurance:
- Term insurance
- Permanent life insurance
Term life insurance gives coverage for a set number of years, known as the term.
For example, you sign up for a 10-year term policy. After 10 years, your insurance expires. If you pass away, your family doesn’t receive the death benefit because your policy is no longer active.
Permanent insurance protects you for as long as you pay your premiums. It’s often called whole life insurance because coverage can last your whole life.
Whole life policies also include an investment element. This investment account helps you build cash value in your insurance policy over time. A portion of your premiums goes to your cash value account.
You can use this money on things like paying your insurance premiums or as extra emergency savings.
Disability insurance, or disability income insurance, helps replace lost wages if you can no longer work. There are two types of disability insurance from private insurance companies:
- Short-term disability
- Long-term disability
Short-term disability coverage helps replace your wages if you’re out of work due to injury or illness for a short time. For example, you become ill and are hospitalized for a month. Your insurance should help cover a percentage of your lost wages.
Likewise, long-term coverage helps replace your lost wages after your short-term disability ends. Some policies even cover disability payments to retirement if your injury or illness is severe.
Set up sinking funds for future financial emergencies
Sinking funds are ideal for planning for the unexpected. A sinking fund is really just a savings account where you deposit money (or “sink” money) each month towards a specific expense.
Unlike an emergency fund, which helps pay for any unexpected expense, sinking funds usually have a defined use.
For example, your car is getting old and has lots of miles. Although it doesn’t have problems right now, it’s probably a matter of time before a component breaks. You can plan ahead by using a sinking fund for car repairs.
Each month, you deposit a small amount of money into the account. When your car stops working and needs repairs in six months, you have the funds to cover the unexpected repair.
A savings account is the most often-used place to put sinking funds. They’re protected with banking insurance, so you know your money is safe. Most savings account also earn a little bit of interest on the money you save.
With the rise of online banks and online banking, it’s even easier to save for financial emergencies using sinking funds. You can open a savings account (often for free) for each fund. This helps keep individual sinking funds separate as you save.
Medical expense savings
In addition to savings accounts, most people can save for medical expenses using one of two healthcare savings accounts:
Both types of accounts let you save up pre-tax dollars for use on medical expenses.
Employers open FSAs for their employees to help reduce the cost of medical care. The employer owns the account and funds must be used in the calendar year. That means if you have money left in the account on January 1, you’ll lose it.
An HSA is also a savings account for medical expenses. Unlike an FSA, however, your employer doesn’t own your account. Additionally, you can save up funds for as long as you like—you don’t have to use them by the end of the year.
Most HSAs let you invest your savings in mutual funds and other investments to help them grow over time.
Not everyone qualifies for an HSA, however. You need to have a high-deductible health plan (HDHP) to open an HSA. You also can’t be enrolled in Medicare.
Make an estate plan
An estate plan is a roadmap used by your loved ones to manage your assets after your death. Making an estate plan can greatly help your family and friends in the event of your death.
It lets them focus on grieving, rather than trying to figure out who should get your money, house, or other assets.
Estate plans are also used if you become incapacitated. For example, your health deteriorates and you can no longer make your own decisions.
Your estate plan includes directives or a Power of Attorney giving your loved ones the power to make decisions on your behalf.
You can utilize an estate planning checklist to help you get started. This is a good jumping-off point to get your assets and affairs in order.
Keep detailed records in case of financial emergencies
Staying organized can help you overcome a financial emergency. It might not seem that urgent right now, but having easy access to documents or other information cuts down on your stress during an emergency. You’ll be able to think more clearly and make sound decisions.
Keep yourself organized by storing important information, such as insurance and identification documents, in a secure location.
You could consider investing in a fireproof safe for your home. Small safes tend to be less expensive but still provide an easy place to store paper documents.
Practice proper maintenance
Maintaining your car, home, and body could help you cut the cost of a financial emergency.
Preventive maintenance and care are essential for the longevity of just about everything. It can help you catch—and fix—problems early, before they become expensive emergencies.
Car and home maintenance
Regular maintenance on your car and home helps prevent small problems from becoming big issues. Your insurance company probably even requires it. Most insurance companies won’t pay for repairs caused by a lack of maintenance.
For instance, you forget to get an oil change for your vehicle. The engine dies while on the freeway and you run into a median. It’s possible your insurance company might not cover the cost to repair the body damage because poor maintenance caused the accident.
Preventive medical care
Just like your car or home, regular checkups are important for your body.
An annual physical, for example, can help you detect potential medical issues before they become emergencies. Likewise, regular dental or vision checkups could help you prevent disease before it starts.
Many health and dental or vision insurance companies even cover the full cost of preventive care. This makes it a no-brainer to schedule an appointment and maintain your personal health.
Plan ahead to reduce the sting of financial emergencies
The truth is, no one can predict an emergency. This list of financial emergency examples isn’t exhaustive. However, you can still prepare for an unexpected expense, even if you don’t know when (or if!) it’s coming.
Start by looking through your finances and considering what you’d do in a financial emergency. From there, you can decide how to save for emergencies.
If you don’t have an emergency fund currently, you can start one. Or, if you haven’t maxed out your HSA contributions, you can focus on adding more money to the account.
As always, good financial planning requires a budget that works, and continued research and learning about finance.