How important is an emergency fund?

How much one should keep around in an emergency fund really depends on risk tolerance and how quickly one can access a big wad of cash for emergencies.  I tend to believe that those with high risk tolerances have probably never experienced a true emergency, or at least one that could seriously stress your wallet. Most of those financial bloggers out there who proclaim that they have $0 in their emergency funds are typically young without kids.  Sure, you should put your money to work for you, but sometimes you do get unlucky and stuff hits the fan.  The same analogy can be made with putting 100% of your investments in the stock market. Do you start panicking when your invested worth drops by 80%? What happens when junior gets diagnosed with pulmonary atresia, you get locked out of some insurance plans for a pre-existing condition?

Uncommon events are uncommon, but someone will eventually represent the uncommon statistic. Sometimes life will suck for that statistic.

Point in fact: I encountered a major plumbing problem recently that clearly stressed my wallet.

Without boring us with the details, we essentially had no running water in the house.  From start to finish, there was probably no access to water in the house for about five days.  No faucet water. No toilet water. No shower water.  This experience also served as a reminder how dependent we are to modern conveniences like electricity and plumbing.  I even had access to water while at work, but I was still miserable! In contrast, much of Puerto Rico still doesn’t have potable water or electricity after an entire month!

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This particular plumbing problem was clearly above my skillset.  I would have needed over $10,000 of plumbing equipment plus some serious experience to have fixed this myself.  I ended up calling upon some plumbers to get some quotes.

Wallet gouging expenses do hurt no matter how you put it.

Ouch. This is where an emergency fund would come in handy. Fortunately my plumber accepted credit cards at no additional charge, so I was able to use my credit line. Imagine, however, needing to come up with a check or that amount in cash.  That would definitely put a strain on anyone’s wallet.

Ultimately, having immediate access to some cash can’t hurt. Because I am currently still in the earning stage of my financial career, I will most likely have at least biweekly access to some cash through my paycheck as a buffer. However, my emergency fund consists of a credit line on my credit cards. That’s probably not the ideal way to access cash, but the credit card companies also grant me with check writing capabilities as well in case I run into situations where credit cards won’t help. Will this protect from all financial disasters? Not even close, especially if zombies take over the world. But I think that it covers most of the situations that I would expect to encounter.

How do you handle your emergency funds?

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  • PICU MD

    Back when I was a resident (single and childless) and a fellow (childless) credit cards seemed like a good idea for an emergency fund. Whenever something unexpected happened I would swipe. However, I couldn’t imagine that now.

    I think a more interesting question is what to do with the EF? While many recommend a money market, I think you need to keep some local in the bank. Many real emergencies don’t have the time for the one to two days to get the money from Vanguard or Ally to your bank. Especially for the household stuff where you save by paying in cash.

    • Smart Money MD

      I’ve definitely had handymen services and other plumbing/electrical services where the contractor was willing to take cash (no checks either) for their services in exchange for not charging me taxes. I’ve never taken them up on their offer mainly b/c if something went bad there would be no record of their work.

      I do keep some funds in a local credit union, however. This is mostly for emergency cash. Additionally, I have accounts on CapitalOne and Schwab. These two servicers have no-fee ATM cards for its users. Also great for traveling abroad when you want to withdraw cash.