“I know, I know” you say, “I should have an emergency fund, but you don’t understand our financial pressures. We are living paycheck to paycheck and I can’t see the value in leaving several thousand dollars on the sideline doing nothing.” This financial pressure is exactly why you need an emergency fund.
When my wife and I moved into our new home there was a room that was conspicuously absent of furniture. We considered our options and budget, and my wife’s sense of style (I have none), and we decided on a sectional. We perused the local furniture stores and found one that would fit the space and our needs.
Some months later, as I was working at my desk in another room, I heard my wife call “Scott, can you help me.” My wife had been working on a writing project, sitting on the brand new sectional, when her pen exploded, yes, exploded, bright blue ink in splotches that dotted the sectional and the carpet. I quickly ran and fetched our compact cleaning machine but soon realized the job was too complex, there was ink everywhere.
The magnetic business card was still on the refrigerator of the company that cleaned our carpets when we moved into the house. A quick check of their website confirmed that they cleaned upholstered furniture. We called, and he was at our home within an hour. That’s service. After looking over the job, he gave me a price of several hundred dollars to clean the stains.
And this is where the emergency fund comes in. There is no line item in our family budget for cleaning up exploding pens. But there is an emergency fund. Knowing that we had the money to cover this expense, there was no hesitation in encouraging him to get to work. Several hours later the ink stains were gone and the sectional saved. Were you to examine the sectional today, you would find no evidence that there had ever been an exploding pen incident.
For many families, a credit card is the emergency fund. The problem with this approach is that you are not only covering the cost of the emergency, but adding a 15-20 percent Annual Percentage Rate interest charge if you don’t pay off your card balance every month. Instead, start putting away an amount every month for emergencies, items that are not in your regular budget. Life on planet earth is an unscheduled progression of minor and major catastrophes. The emergency fund softens the blow when these unexpectantly arrive.
Many financial planner suggest having 3-6 months’ worth of living expenses set aside as an emergency fund. If you’re not at this level yet, add to your fund every paycheck until you get there. This money won’t be sitting on the sidelines. You can earn attractive interest in an online high interest savings account or money market fund. You will also be providing peace of mind, knowing that when Murphy’s Law will eventually arrive at your door step, you’ve got him covered.
