A $10,000 emergency fund. Seems like a pile of money doesn’t it?
Some time ago, Mike Holman wrote an article for Moneyville in the Toronto Star and his emergency fund needs are even larger, $20,000 actually. $10,000 sounds great but it’s really not that much money. A few mortgage payments and for some of us, close to half of that money is gone right there.
A fact of life is…life happens and bad things go with it. Appliances and cars break down. The furnace conks out. The air conditioner burns out. The list goes on. These realities often require us to fork over significant funds to right the ship. Maybe I worry too much, then again, maybe I’m just realistic. What I do know is I like being prepared for the “what ifs” in life not to mention I don’t have very good luck. I guess that’s the first reason why we want to have a modest emergency fund – it provides us with some piece of mind when our luck does run out.
The second reason why we want $10,000 in our emergency fund – it provides us with financial flexibility. If, rather, when something goes wrong with my 12 year-old Mazda it’s usually something big. Gone are the days of simple oil changes every 8,000 km. A healthy emergency fund in our high-interest savings account allows us to combat any car failure and weather another major expense should it happen at the same time. My real life example occurred when my car wouldn’t start and we needed to install back-up sump pump for our house before the spring thaw. Keeping our emergency fund at a modest amount and readily available allows us to have access to cash if we need it. Having a healthy cushion of cash allows us the freedom to work through our emergencies and keep our needs in check at the same time.
The third reason why we want a modest emergency fund – it keeps us out of debt. Unlike a line of credit (LOC) these things are not a bottomless pit like some people believe they are. Credit is just that and with an LOC, you need to pay it back. LOCs are not savings or assets they are a liability. In an emergency situation the last thing my wife and I want to do is to add-on more debt. I’d rather focus on the emergency and deal with that. I have enough debt to worry about with our mortgage.
The fourth reason why we want our emergency fund – it keeps us in control. Further to using a LOC as an emergency fund, we’re not in control if we tap into it, the bank is. The bank determines our borrowing rates and payment criteria. Rates change as do bank policies and procedures. I don’t want to be left holding anymore bank debt than absolutely necessary. Too many strings attached for me and I don’t want to be the bank’s marionette.
The fifth and final reason why we want our emergency fund – we will never be immune to those “what ifs” in life. As I stated at the beginning of this post, life happens. No matter how stable our jobs might seem, how good our health may feel, we know we are not immune to the realities of life. When the proverbial stuff hits the fan, I have no predictive power in knowing how long we’ll be stuck in that crisis. It could last days. It could last weeks. It might last months if we lost our jobs. Who knows what the future might bring. We think an emergency is the worst time for us to dive into debt.
Like home, auto or life insurance, creating financial security through a modest emergency fund just makes sense. Having close to $10,000 for emergencies is a great security blanket that should cover us nicely for the majority of events. If and when times are uncertain, we’ll take all the extra help and security we can get.
Where are we now?
We don’t have $10,000 in our emergency fund but it’s a longer term goal for us. We’re saving for it and I’ll provide an update when we get there.
What about you? Do believe in emergency funds?
If so, what is your magic number for your safety blanket?