Why You Need an Emergency Fund and How to Get One
Last year, Mitch and Jenn had a string of bad luck. Mitch broke his leg in a skiing accident, Jenn’s car broke down requiring major repairs and their home’s aged roof decided to fail right in the midst of a major storm.
The timing for all of this wasn’t ideal—four weeks before Christmas. The financial and emotional toll of these events continues to be huge, but nothing like it might have been if they hadn’t been diligently building their Contingency Fund—more commonly known as an emergency fund.
Mitch’s health insurance is covering most of the costs of his surgery and follow-up therapy. Still they’ve had to come up with more than $2,400 to cover his deductible, co-pays and prescriptions. The car repairs were just shy of $2,700—not surprising given their Subaru’s age and 140,000 miles.
It was the roof that really threw them for a loop. The estimate to repair it—with no assurance that said repairs would last for longer than a few months—was $750, with a new roof coming in at $12,000.
Suddenly, their healthy $18,000 Contingency Fund didn’t look quite as massive as it had only days earlier. All of these financial emergencies were of top priority. None could be ignored.
The medical bills and car repairs reduced Mitch and Jenn’s CF to about $12,500. They opted for the roof repair of $750 to buy themselves time to save for a new roof.
So far the roof repairs are holding well. They’ve had time to get additional estimates and it looks like the cost will be closer to $10,000, which given the circumstances, comes as good news.
Mitch and Jenn are crash saving so that when they replace the roof this summer, the cost will not deplete their Contingency Fund. And they’re committed to continue saving like that to restore it back to $18,000 by year’s end.
Now, I’m going to predict what the majority of my readers are thinking about now:
Sure, Mitch and Jenn are wealthy so of course they have money to save. Or, they’re lucky because they have two incomes, we have only one. Or, must be nice but what about those of us who are unemployed, unhealthy, deeply in debt or [insert excuse of choice here]?
As long as you see building your Contingency Fund as optional, there will always be something more pressing to take priority.
Need specific reasons to grow your CF? Here they are. Learn them well, then believe with all your heart that something on this list is coming your way:
Chronic illness. I am not an advocate of running to the doctor for every little thing. But when you or someone in your family is really sick or is involved in an accident or contracts a horrible disease—you need to be prepared. Insurance only goes so far these days.
The dreaded pink slip. Getting a pink slip is never fun and when it comes out of the blue with no notice, it will be shocking. You need a way to pay your bills until you get another job.
A distant job. Your next job may be four states away. Moving will not be cheap.
Serious breakdown. Sure you can ignore all the warning signs of impending car trouble, but when your car gives up and breaks down, you’ll have a problem. If you think auto maintenance is expensive, wait until you see the cost of repairs.
Disaster. A broken furnace, leaking roof, natural disasters—who knows what form this type of emergency will take? That’s why you need to have money stashed away, just in case.
Final call. Who wants to plan ahead for mourning? Not me. But knowing I have money stashed in my CF for when bereavement requires travel means that I don’t have to think about it now. I’m prepared.
I understand these are tough times to find money to save. But do you really have any options? If your current lifestyle is sucking up every last dollar of your income thereby putting you and your family at risk, it’s time to make changes.
Start small. While you need a big, healthy Contingency Fund (equal to at least the amount required to pay all the bills and keep food on the table for six months without any paychecks), do not focus on that big number. Start by saving $500. Then reset your goal to $1,000. Now you’re on your way. You’re catching the savings bug. Soon you will reach $2,500. Then $5,000 will be in view.
That’s the way to do it. But you’ll never reach your goal until you get that first $500 out of reach and safely tucked away in a savings account.