Immediate action is required. In order for us to take immediate action to address emergencies, planning needs to take place in advance. Most of that planning involves saving money right?
Emergencies can mean losing a job, fixing a leaky roof, paying for an emergency room visit, fixing the air conditioning unit in mid-July when temperatures are in the 90s, paying a huge deductible on dental work, and replacing the timing belt and water pump on your car otherwise the engine can drop at any time.
I mention these specifically because I have experienced almost all of them. Fortunately for almost all the ones I experienced, I was able to dip into my emergency fund instead of paying by credit card. Actually, let me take a step back, I did use my credit card for the purpose of earning points but paid it off in full. More on credit cards at a later time and date 🙂
How Much Do Emergencies Really Cost?
Some of the most common emergencies can include the following:
- Losing a job, this can take up to two months to replace. So if your monthly living expenses are for example $3,000, then you may need $6,000 to cover these until you find a replacement job.
- A leaky roof which can cost an average of $650,
- Emergency room visit, which varies quite a bit, but at least per Blue Cross Blue Shield of North Carolina, could be $1,233. We live in Maryland and have been to the ER before and when all the bills finally came through, I remember spending over $1,000.
- Air conditioner replacement could be anywhere from $3,000 to $6,000. Actually, I remember many years ago when I was a teenager my dad had to get our air conditioner replaced in our old townhouse and I think it cost about $4,000.
By the way, a sale on a 4K TV is not an emergency and especially if you already have a TV. There will always be a sale, but there won’t always be a need.
Do I Really Need THAT much?
Generally, it is good to over plan something. At the same time, however, it may lead to opportunity cost or situations in which you may not be able to participate in an investment opportunity because you’ve over planned for emergencies. Recently I had an epiphany while reading the root of good’s website. Here is an excerpt that opened my eyes:
“Every year we saved more than half of our income. In other words, we saved all of my paycheck every year and then saved part of Mrs. RoG’s paycheck, too. This meant we were immune to financial catastrophe if one of us lost a job. As a result, we never worried about keeping a large emergency fund and instead preferred to invest as much as possible to maximize our long term returns. It worked.”
Thanks to the Root of Good, I realized my emergency fund may not need to be as large as I had originally anticipated. Both my wife and I work. If one of us loses our job, we may be able to qualify for unemployment.
Alternatively, in the meantime, I could use my SUV as an Uber to earn some money. Also, the job market is doing alright in our line of work so bouncing back should not be too much of a problem…hopefully 🙂
So as a result I’m in a better position investing the incremental difference between what I originally thought I needed in my emergency fund and what my new estimate is now (difference in a few months of expenses). Now I need to deploy this into the market – let me know if you have any ETFs or index fund recommendations!
How Can We Avoid Emergencies Altogether?
One word: ANTICIPATION. If you read the news or come across emails indicating your organization may be struggling, determine if your specific position is at risk. If so, start looking for a new job or take steps to see if it’s feasible to transfer to another department.
If your roof is coming up at its 20 year mark soon, start getting estimates for replacement and earmarking funds. Maintain your HVAC unit by regularly changing the filter, getting the coils and air ducts cleaned. Cut down on hard candy and soda for your kids (I’m guilty of this :-)). And finally, refer to the maintenance schedule of your car and see if any major work is due that hasn’t been performed.
Then start to get quotes if you don’t have a trusted mechanic to get the best price and quality work. If you don’t have a manual and have a fairly new car, you may be able to find a PDF version of the manual online. Plus it’s easy to do a search to find the maintenance schedule in an electronic version anyway.
Having said all of that, there will be times when some emergencies are unavoidable and come straight out of nowhere. For example, I used to own a Jeep Patriot and one morning my wife was driving it to work. On the highway, it just slowed down to around 40 miles per hour and was running really heavy. Long-story short, a sensor needed to be replaced and my mechanic (whom I’ve been with since I was 16) said it was typical for this car and I verified online in Jeep Patriot forums. So about $700, a few hours later, and a used up vacation day later, my wife got the Jeep back running just fine.
So do you have an emergency fund? If so, do you think it’s over-funded, under-funded or just right? What is your basis for funding it? Oh, and have you dipped in it for non-emergency type expenses?
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!