The Importance of An Emergency Fund

If anything, February has re-affirmed the importance of having an emergency fund.  At the end of January we had the opportunity to buy the railroad bed behind our house, and were able to move quickly because we had a large store of cash. Right on the foot prints of that purchase we had several emergencies which cost us well over a grand.  Without an emergency fund we would have had to charge these expenses on a credit card, and pay interest for months until it was paid off, certainly not something anyone would want to do.

Purchasing the railroad bed wasn’t an emergency, but it was a once in a lifetime opportunity. The railroad had owned the property from the late 1800s until the early 1980s, and sold it to a family who owned adjoining land at the time, and that family had been the sole owners up until my purchase.  This acquisition set us back $3,500 in cash. It was well worth getting, but we still had to pay out of cash reserves to get it.

Right around the time we came across the opportunity to buy the railroad bed, but before we closed on it, my employer cut my hours. We originally had a 45 hour per week schedule for buildings and grounds work, but the powers that be decided that if we aren’t in the middle of a snow storm on our last day, they do not want to be paying any overtime.  This cut 5 hours of OT for about a 3 week period for my crew. It doesn’t sound like a lot, but over a few weeks the numbers add up to several hundred dollars.

Directly after the purchase of the railroad bed my wife woke up to a horrible sound originating from our utility room.  The pump for our boiler had gone out.  This pump was over 25 years old, and we had two options, repair the pump for $150 or replace it with a new model for around $400. We replaced it to ensure we would get a good run out of it. Keep in mind this is the middle of February in Michigan and being without heat is not an option.

The next week Mrs. C. had brought up that our van was GROSSLY overdue for a timing belt change and that we would need to replace it as a preventative step because if we didn’t we could blow the motor if it broke.  We had a family friend experienced in such jobs change it out, but after he was done the van started having some issues.  We had to take it to the dealership to have it diagnosed. The timing job was done right, but the valves needed to be adjusted.  All in all the total for our van repairs cost just over $1,000.

To top it off, last year due to the nature of my work, I ended up overpaying Uncle Sam by around $3,000.  This money was earmarked to increase our emergency fund.  I screwed up on our tax form and inputted the wrong routing number on the refund line.  Originally I was going to have it deposited into my bank account, but for convenience we decided to switch it to Mrs. C.’s account. I changed the account number, but forgot to change the routing number. Because of this the IRS will be mailing us a paper check, which delayed us receiving our refund for about a month.

Emergencies aren’t just things breaking. Emergencies are anything that disrupts normal cash flow.  Getting your hours cut at work can qualify as an emergency.  Having a large check delayed counts as an emergency.  Any unplanned expenses or reductions in income are financial emergencies and it is imperative to be prepared for them. We typically don’t know what is going to happen, but we do know that SOMETHING will happen.

I remember several years ago telling my dad that part of why I hadn’t moved forward with retirement savings much was because 4 of the last 5 years I had had several large unplanned expenses.  He then countered by saying, (paraphrased) “In 30 years you’ll probably be saying in 34 of the last 35 years I have had several large unplanned expenses.”  I just happened to have gotten lucky one year. The nature of life is chaos and no matter how well we plan, there will always be eventualities we can’t plan for. having an emergency fund with a large cash cushion certainly transforms many of these emergencies from disastrous to a mere inconvenience.

Action Steps:

• Set a written down goal of what you want your emergency fund to be.
• Maximize your budgeting delta to save faster.
• See if you can earn a bit of interest off your emergency fund.
• Replenish your emergency fund after any depleting event.
• In addition to storing cash, build up a 6 month food storage supply to lessen the blow of any job loss or other financial emergency.
• Stack Your Money and Act Broke

What was your most recent financial emergency?