It seems every article I write lately has me starting out with something like “when I was growing up”, but bear with me (note: a draft I have also starts that way, so you’ll see it again soon)…
When I was growing up (haha!), my mom would constantly tell me “money burns a hole in your pocket! You’ll never be able to save for anything”, and she was right. After a birthday party or Christmas or graduation, I just had to go spend that money on ANYTHING! If I could get my money back on all that crap I bought, I’d be, well, not rich but at least have a nice savings. The thing is I can’t remember a single thing I bought which shows that it was all for instant gratification and fleeting emotions. Actually, I think a few of my purchases were probably books, and books are good, so they weren’t all bad, but that’s besides the point.
Back to the topic: Emergency Funds. Why are they important? Well I have two real-life examples for you. Luckily neither affected me directly, but both are close to me.
The Curse of the Bad Plumbing
I won’t try to pretend I know this whole story, but what it boils down to is a friend of mine in my hometown was required to redo sewer lines that led into the house (thus, their property) from the street because it was causing leaking and other junk. On my friend’s part, they’ve had flooding in the basement for decades and, personally, I think this was a good thing that finally forced them to do something about the moldy carpeting and old furniture in the basement, but at a high cost.
After getting a number of quotes, they went with a reputable company who had a better plan that meant less destruction (i.e. didn’t require tearing up the entire driveway, just part of the basement floor).
The cost: $8000
Problem is this isn’t my friend’s house. It’s her mom’s house and they’ve been co-habitating families for years. The mom has absolutely no savings, is on fixed income and is actually way over her head in debt, while my friend had been working for years to build up a savings account of, well, just about $8000 which is an amazing amount for my friend (whose husband’s pockets also burn when cash is in them).
Their options were either
1. The mom get into even more debt (if the bank even allowed it) or
2. The friend use her savings for the work and hope she’ll get paid back somehow
They opted for option #2 because there was no way the bank would, or should, give more debt to the mom in her current financial situation, age and physical condition (she simply can’t work). This means that my friend’s emergency fund came in handy at a much-needed time, as she also couldn’t get a loan for various reasons.
Let’s just hope she can get her money back!
The Bad Furnace
This is a much more common occurrence. You own a home and your furnace dies. But do you know how expensive a new heating system is? Well, for one friend, it’s $9000!
I’ve known this friend for 10 years, and he’s actually almost 10 years older than me. He has 2 kids, bought his house at a good time before the peak of the market, but he has a couple issues:
- A mortgage AND a maxed-out home equity line of credit (HELOC) used to finance improvements and whatever.
- A good bit of credit card debt
- A brand new luxury SUV loan
- A nearly paid-off luxury sedan loan
- Only part-time income from his wife
- A love for gadgets and electronics, and generally just browsing the internet for deals (usually during work hours)
I think he’s at a point in his life where I was when I was 9; money just burns a hole in his pocket.
His biggest problem though? He only has cash savings of $2000. Seriously, you’re in your 40s and all you have in cash is less than your net bi-weekly paycheck? Come on man! And this guy makes 6-figures PLUS his wife’s income!
So he was telling me this week that he could he doesn’t know where to get the extra money, especially since the old furnace is dead and winter is coming on soon. He thought of the following options:
1. Pulling from his retirement accounts (e.g. 401k)
2. Going with a contractor who offers a payment plan
3. Getting more, if possible, out of his HELOC
No matter what, all three of the options are going to cost him much more than $9000 in interest, and he’s the type who only pays the minimum on his debts (yet he insists on 10% tithing even when the same Good Book looks down very strongly on those who do not repay their debts in a timely manner and to not needlessly accrue more, but I’m not one to judge…much).
Where do we stand in comparison?
It’s taken a ton of self-restraint, some heavy frugal living and debt paydown, but we’re finally at a point with no debt except our first mortgage (no 2nd mortgage, HELOC, student loans, credit card debt, personal loans, etc.). We no longer live paycheck-to-paycheck and I’ve actually found it a problem to try to figure out what to do with our extra cash each month (savings, investments, paying down mortgage, charity, etc.). We’re not rolling in dough by any means, but we’re not the struggling newlyweds of 8 years ago!
I won’t say how much total we have in cash savings (different than money in investment accounts), but it’s close enough to mid-five figures that I’m pretty confident that we can handle many emergencies as needed, outside of some major health issue or accident, but that’s what insurance is for up front.
But I actually have our savings separated out into multiple accounts: emergency (like a dead furnace or major auto failure), home (such as improvements), travel (which we’re using for a European trip), and auto (either for an eventual replacement to one of our cars or a “fun car” for me). But combine all of these accounts and the sum is amazing compared to where I was at age 9, 19 or 29. I’m 33 now (if I did my math right) and could definitely be much further along with our financial planning, but we’re doing well for ourselves.
But then again, we don’t have kids or pets or any other dependents. And as long as I can hold in my urge to buy a car, we don’t have any other financial fetishes to fulfill.
And that, my friends, is why you need an emergency fund. It’s not just for when you need it, but also for the peace of mind it gives you.