A few years ago on this site, I wrote about stashing away a modest emergency fund. Here are my reasons for doing so which remain valid today:
- It provides us with financial flexibility. When something goes wrong with my 12 year-old 16-year-old Mazda, it’s usually something big. Gone are the days of simple oil changes every 8,000 km. A healthy cash emergency fund allows us to combat any car failure and/or weather a different expense around the house.
- It keeps us out of debt. While it’s true an emergency fund will eventually run out if you spend it all, the same can be said about a line of credit (LOC); these things aren’t a bottomless pit. Contrary to how some people treat their LOC – it’s not your money – the line needs to be paid back. An open line of credit is a liability. In a small 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. Besides we have enough debt to worry about with our mortgage for the next five years.
- 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 payback criteria. Borrowing policies and procedures change. I don’t want to be left holding any more bank debt than necessary.
- We will never be immune to those “what ifs” in life. $hit happens. No matter how stable things seem or how good our health may feel, we’re not immune to the realities of life. When the stuff hits the fan I know I have no predictive power in knowing how long we’ll be stuck in that crisis. It could last days, weeks or even months. Who knows what the future might bring. Having a $10,000 emergency fund is a decent security blanket for us that will cover some expenses for a short period of time if something pops up.
For years we always had some sort of cash emergency fund but not as much as this goal. It took us a few years to get here but we made it. There is an opportunity cost with any cash buffer but our piece of mind is hard to put a price on.
What’s your take on emergency funds? Got one? Don’t care for one?