Emergency Funds (EF): Why?


Maybe this seems like a weird place to start a blog on money and finance. Most books seem to start with creating a family budget, understanding your spending etc. but I really believe you are wasting your time with those things if you don’t first understand the importance of having an emergency fund. This also happens to be one the areas I have had the most “discussions” with friends and family about. I amazed at how many people just don’t seem to understand the importance of an emergency fund. (And yes, an EF is EXACTLY as it sounds, a savings account there for you to use in case of emergencies).
Here is an example of a conversation I have had numerous times with various people.
me: You should really have an EF
Them: I can’t afford it I have too much debt I need to pay off first
Me: So what will you do if something happens to you or your spouse like you lose a job, get in an accident etc. and need money now.
Them: I put it on the line of credit
Me: So you are busy digging yourself out of debt but are prepared to go back into debt for an emergency?
Them: What other option do I have? I can’t afford to pay off my debt AND save. I’ll save once I am out of debt. Besides, I have insurance.

Can I be frank and say this type of thinking frightens me? No, seriously, it frightens me. We are all so guilty of thinking “that will never happen to me” we refuse to stop and realize…at some point in our life it probably will. At some point we will all experience personal emergencies. Look at the mass flooding through Alberta, do you think the people whose homes are destroyed were expecting that? “Oh it’s summer 2013, seems like a great time to lose all my belongings to a flood” of course not. I had a friend whose father passed away not too long ago in a car accident. He was young and healthy, but hit head-on, on a highway and that was that. Her work gave her bereavement leave for a week but her father just passed, she was not ready to go back to work in a week and who could blame her? She ended up taking more time off, and an emergency fund would have been there to help her.
In fact in a similar situation, my own Dad had a pretty big accident in October 2012 which resulted in a sliced artery, a lot of blood loss, a week in the hospital and a claim to long-term disability. I wasn’t the one the accident, either was my husband, but my Dad was the first man I ever loved and I wanted more than anything to spend that week in the hospital there beside him. Good thing I had an emergency fund. I was able to take a week off work and not worry about the financial consequences of missing 30 hours of work and focus on my Dad. Without that fund, I may have still been able to take the time off work but I would have been double stressed that whole week, stressed about how he was doing and stressed about my personal finances (and the classes I was missing, but luckily I didn’t have any big tests or papers that week and felt ok taking the time off of school as well).
Does it really make sense to stick your fingers in your ears and sing “la-la-la-la” an emergency will never happen to me? Does it really make sense to go into debt (or further into debt) over something you don’t need to go into debt for? Once you pay the interest on that line of credit or credit card you are using for you EF you have now paid substantially more than necessary. What a waste of YOUR money.
If that hasn’t convinced you of the importance of an EF think about this. My husband and I started our EF in late April 2012. We have almost $2000 in there (the goal for us is $7000 but I’ll get to that in the next post). Having this money sitting there, gaining interest, ready to go in case crap hits the fan has allowed us the freedom to call our insurance broker and raise all our deductibles to $1000. Between our home insurance and 2 vehicles, raising our deductibles has saved us a butt-ton of money. Where did we put that money? Debt repayment. Now the consumer debt is paid off and we suddenly have a lot of extra money a month that was budgeted elsewhere. What to do with it? Blow it. Put it in the RRSP, bump up our EF savings, start a travel fund, boost our savings for a down payment on a house….oh the options! What a wonderful concept isn’t it? Having options.

Next money blog: Why insurance alone isn’t enough for an EF and how everyone, yes, even you, can start an EF without even noticing it.


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