Articles abound by ‘financial experts’ on how to save money quickly. You see them everywhere, all pointing out the virtues of funding an emergency savings account roughly equal to three (3) to six (6) months living expenses, depending on the stability of your occupation. The real challenge when financial planning for emergencies is that you’re dealing with the unknown; you simply don’t know how expensive each crisis will be, or when they’ll happen.
Find It & Fund It
They make it seem so easy to adjust your withholding, drop the gym membership, take your lunch, ride the bus, caulk your windows, cut the cable, sit in the dark, and live with your parents to find a little extra money in your budget. Then it’s simply a matter of automating the savings process; set-it and forget-it and in 5 years your emergency savings fund will be ready to face any personal financial Armageddon life can throw at you.
Not So Easy
The reality for most of us is that it’s very difficult to maintain the cashflow discipline to build a reserve of this magnitude. It really can take many years of consistent savings, hopefully with no reason to draw-down until the fund is well established. Of course, life happens at the same time; it’s challenging.
Unfortunately, with saving accounts yielding next to nothing there are several tempting alternatives competing for our emergency fund dollars. Although, tasking the Roth IRA or establishing approved lines of credit to meet the emergency funding need each have their drawbacks. Sometimes savings account liquidity is its own reward, no matter the paltry return.
Coming in to this year I was satisfied with our emergency fund. We had consistently been saving money for the inevitable ‘rainy day’ and thankfully had not been confronted by any major financial set-backs. So confident was I that I even began contributing additional money towards our mortgage principal.
Then we started to spend money, mainly from the emergency fund:
- I cleared the last of the tuition expenses for my masters degree
- My bicycle frame shattered, while this was covered by warranty I still paid for new parts and a bike shop rebuild
- Ongoing kitchen renovation
- Living room renovation
I don’t classify any of these expenses as emergencies, and to be honest our emergency fund was still fairly robust. Then the big bills came in:
- Home air conditioning system needed to be replaced – old system was in-op.
- Roof replacement – could have repaired it, but it was close the end.
- Car crash – no injuries, curbed the car while looking at Christmas lights (major embarrassment). Chasing low premiums really hurts when you need to file a claim and pay a massive deductible.
It’s reasonable to argue that these costs are not emergencies either. Home related expenses should be expected and budgeted for, and it’s smart to keep at least enough in reserve to pay the auto policy deductible. Anyway, the spending has accelerated up to this week, and the money we had saved for emergencies is gone. At least we’re not in the red ink, yet.
Now, please let me knock-on-wood before we have a real emergency like a sudden job loss, medical crisis, or worse.
The lesson here is that our emergency savings were inadequate. They should have been double what they were. Now it’s time to aggressively rebuild and save money before disaster strikes.
How satisfied are you with your emergency savings?