The Importance of having an Emergency Fund
admin Mon, 04/14/2008 - 04:00
If you spend any amount of time reading about personal finance on the internet, you will eventually find a common thread about what to do.
- First, stop the bleeding. This means stop using your credit cards.
- The second thing is to establish an emergency fund. Most places advocate an emergency fund of $500-$2000 dollars, with $1000 dollars being the most commonly recommended.
When I first read it, it did not make a whole lot of sense. The money that I was putting into the “Emergency Fund” could have been money that was going to reduce debt. Well now I see why it makes sense. Life Happens. Just when you think that you are about to get ahead, life happens. My emergency fund has been in place for well over 2 years now, and I have been making pretty good progress to getting my consumer debt (read everything but mortgage) paid off. I have been actively tracking my spending (I can tell you where almost every penny of my pay check goes), reducing my spending, paying more towards debt, and things were going pretty well. Then Life happened. Our freezer/fridge died on us last Friday. The good news is that the problem was fixable, and we did not have to purchase an entire new freezer/fridge that would have started around $1000.00 and gone up from there. The bad news is that while it did not cost $1000.00 or more, it did cost $250.00 and a half a day of work.
Since I am in my debt reduction mode, I have been putting all extra funds towards reducing my debt. As such, I do not have a lot of wiggle room, and I did not have the $250.00 dollars to spare to get the fridge fixed. Thankfully, I do have an emergency fund that had enough to cover the repair. If the emergency fund was not there I would have had to used a credit card to pay for it, and that just would have added to the debt load, and potentially made me feel worse. Because I did have the emergency fund, I was able to write a check for it, and it was all over. Sure my emergency fund is now $250.00 lower than it started out as, but I was able to pay for the repair without having to use a credit card, and I did not add any debt (stop the bleeding…).
So now that I have actually used the emergency fund, I understand the reason for it. It allows you to make sure that your “stop the bleeding” efforts do not get eroded by an instance where you needed money in an emergency. I think that it is a really good idea to have an emergency fund, and in fact I am now thinking about how I can increase the amount in mine.