22 Oct 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.
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?