Why You Need an Emergency Fund

By Wendy Mihm | Monday November 29, 2010

You are a responsible adult human.  You need an emergency fund.  Don’t kid yourself.

Why?  Here’s a list of ten real-life things that could happen to anyone – even you – at any time.  And if you don’t have the cash to deal with them, you could be left in a very bad position, which we’ll talk about in just a sec.

Reasons You Could Need an Emergency Fund

1. You or your spouse/partner could lose your job.  Or you both could.  With a national unemployment rate of 9% as of October 2010, this is a very real concern.
2. An unexpected home repair could come out of the blue.  Our next-door neighbors just had a gigantic sewer malfunction that resulted in a 9-day project in front of their house, complete with those mini bulldozers.  The bill? More than $12,000. Yes, really.
3. Your car could just up and quit.
4. You could get hit with an unexpected tax bill.
5. God forbid, a loved one could pass away.
6. A parent or other member of the family could become ill and require at-home care.
7. You or your spouse/partner could be required to move as a result of a job opportunity, leaving the other one temporarily unemployed.
8. The ultrasound technician could announce that the bump in your belly is actually twins!  Or triplets.
9. To cut costs in this tough economy, your (or your spouse/partner’s) employer could eliminate your insurance benefits, leaving you on your own to pay for health insurance for your whole family.
10. A spiral of several of these events could pile up, one after the other.  You know how they say bad things sometimes happen in threes?  I’ve had it happen myself.

What Happens If You Don’t Have an Emergency Fund

Now, let’s talk about what happens if an emergency rears its ugly head and you don’t have the cash to deal with it.  You are left, child-like, to ask Mom and Dad, or worse, credit card companies to bail you out. 

Here’s a scenario to illustrate the point. 

The transmission has just died in your minivan and you do not have another form of transportation to get the kids to school and you to work.  Fortunately, your husband has a car that he takes to work so he is set.  But without a reliable form of transportation that will fit one car seat and one booster seat, and that can get you to work every day, you are in some deep doo doo. (But not as much as my next-door neighbors were! Blah!)

You have identified a used Dodge Caravan for $6,500 that would work for your family, but you don’t have any money saved up at all.  It will have to go on a credit card.

Let’s say your best card has an interest rate of 12% and you make $200 payments toward the card each month.  Sounds reasonable, right?  Wrong. 

Do you realize that with this plan you would actually pay the original $6,500 price + $3,175 in interest, which equals $9,675 for a used van?  And that it would take you 12 years and 9 months to pay it off?  The van will probably be dead by the time you pay it off.

You could have avoided all this if you had saved some money in an emergency fund.

I’m just sayin.’

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