Almost all financial advisers will tell you that one of the first steps toward financial freedom is building an emergency fund. This isn’t really a mystery. We all know the benefits of having some emergency savings to help us get through the bumps in life that we all face. Things break and have to be replaced. We lose a job or we become sick or injured and can’t do our job. These things happen to all of us and an emergency fund gives us the buffer to ride out these financial storms.
But while this is the most obvious benefit of having an emergency fund there are other less obvious benefits that can be just as helpful.
Raise your deductibles
Insurance is one of those necessary evils that we all need to have. It is one of the only things we ever buy that we hope we never use. Insurance can also be expensive. But the alternative is not really an option.
We buy insurance to transfer risk. My home burns down and all my possessions are gone. In a moment of distraction I cause an accident and several people are seriously injured. A heart attack lands me in intensive care. These kinds of personal disasters can easily lead to financial ruin if we didn’t have insurance.
So insurance is something that is expensive and we hope we don’t use, but at the same time we know we must have. The question becomes how can we get the coverage we need at the least possible cost?
One of the best ways to save on insurance is raising our deductible. Changing your deductible from $250 to perhaps $1,000 on your home owners or auto insurance can save you hundreds of dollars a year.
If you have no emergency savings though, you can’t afford to take the chance on having a $1,000 out-of-pocket expense.
Skip the extended warranties
Have you ever wondered why retailers offer extended warranties on practically everything? I have actually had a popular electronics chain try to suggest an extended warranty on an item that cost less than $20.
The reason they offer these extended warranties is because they are extremely profitable. Often margins are slim on the actual products sold. The warranties are where they really make their profits.
If I have an emergency fund and my purchase breaks, I am inconvenienced for sure, but I have the money to fix it or repair it. I can self-insure through these bumps in the road and in the long run I will come out way ahead.
Break the cycle of using credit
Most of us have an “emergency fund”. The problem is our “emergency fund” is a little piece of plastic in your wallet not cash in the bank.
No one sets out to intentionally wreck their finances with thousands of dollars of credit card debt. We get a credit card and promise we’ll pay it off each month. Maybe we even say we are just keeping it in case of emergencies.
But then life happens. The stove breaks and we can’t afford to buy a new one so just this once we put it on the card because we have to have a stove. But then before we get that paid off the car breaks down, and then we have to make that out-of-state trip for a relative’s funeral, and then, and then, and then…
We really meant to pay it off each month but one day we wake up with thousands of dollars in debt and we don’t know where it all came from. Every time we start to get ahead something else happens and we are right back in the hole. We lament that we just can’t ever seem to get a break. (I know this is true for many of you, because for many years this was my story.)
If you are ever going to get out of debt you have to break that cycle. Your emergency fund is what allows you to stop your dependence on plastic.
Save on future medical bills and have a happier marriage
OK. So I can’t prove this one but I believe it to be true.
When you have 3 to 6 months of expenses in the bank or more, life is different. You will feel less stress.
When that stove breaks it is an inconvenience not an emergency. You don’t have to worry about where you will get the money to replace it.
When the rumors are floating around the office that things aren’t going well and layoffs are coming, you will sleep differently knowing that you have several months of expenses in savings.
The #1 cause of divorce is money fights. I wonder how many of those fights started around an emergency that they were ill prepared to be able to handle because they had no savings.
Will you live healthier and have a happier marriage if you have an emergency fund? I can’t prove it, but I think it’s pretty likely that the peace that comes from having several months of savings will be life changing.
The foundation of your financial success
In many ways having an emergency fund makes up the foundation stones of a solid financial house. When you have 3 to 6 months or more of expenses saved, life is different. Emergencies become inconveniences. Disasters become bumps in the road.
If you don’t have an emergency fund start saving today. Squeeze every extra dollar you can out of your monthly expenses and quickly save $500 or $1,000. Then work on getting those debts paid off so that you’ll have the extra money to build up your full emergency fund.
You’ll be glad you did.