Let’s face it, there are many good reasons to have an emergency fund. I am going to focus on the top 3.

Emergency funds break your dependency on credit!

We treat credit as our emergency fund. And that has some inherent risks associated with it.

The worst of the risks is that we are now paying interest on our emergencies. So every emergency is costing us more money. The longer you take to pay off the emergency, the more it is costing you. And we all know how easy it is to “make the minimum payment” on our credit as a way of reserving our cash flow.

Using credit as an emergency fund can work, however, IF you have a plan to pay it off quickly and do whatever is necessary to do so. Doing what’s necessary usually means cutting back on expenses to make it happen. Let’s look at a best-ok-worst scenerios.

BEST ~ You review your spending plan, determine where you cut expenses, and you redirect that money to an emergency fund. The car breaks down, no worries, you have the money in the account to fix it. Whew! You are SO glad you took those proactive steps!

OK ~ You don’t have an emergency fund. But you do have available credit. Lots of it. After all, you pay off your credit as quickly as you use it, no matter what the cost. The car breaks down, no worries, you have a credit card in your wallet for that exact situation. You pull it out, pay for the repairs and then tackle your budget to ensure you can get it paid off quickly.

WORST ~ You have no emergency funds but your credit card has available credit. Whew! Thank heavens! You put the car repairs on the credit card and continue to make your monthly payments.  There is little to no thought process of cutting back expenses to pay it off more quickly. You can, after all, afford the monthly expenses. Welcome to the Credit Trap!

Emergency Funds give you Peace of Mind

I have lived both with and without an emergency fund. So I make this next statement with complete certainty … when you have no reserve to fall back on, it is EXTREMELY stressful. Every little thing that happens causes you to make impossible decisions…

• Do I do without food this week to pay for my car’s safety inspection costs?
• Do I skip the power bill to cover the extra costs of school supplies?
• Do I go deeply in debt to get through the holidays so the kids don’t feel deprived at Christmas?

The first thing I did in my spending plan was implement an Occasional Expense Account (that’s an emergency fund with a purpose, in case you are wondering) 😉

This involved making a list of the expenses that definitely WOULD come up throughout the year. There are really five categories that you want to cover:

• Home (maintenance/repairs)
• Car (maintenance/repairs)
• Kids (clothing, back to school costs, too many things to list)
• Pets (vet costs)
• Gifts (all of them! Whatever you celebrate – Christmas, Easter, birthdays, etc. )

I then estimated what I thought I would need for each and began the task of determining where in my spending plan I could adjust to start putting money aside.

I will be completely honest with you. I did not have enough cash flow to do it all. So I started with the one that stressed me out the most – car repairs. I live outside of the city. If my car needs repairs I need to get the repairs done. There was no other way to get to work.  Notwithstanding some major issue with the house, I can let some maintenance go (and have), the kids can wait (they don’t like it but it teaches some very valuable lessons), the pets are reasonably young and healthy and gifts are, quite frankly, optional (in a pinch, I can, and have, come up with alternatives to gift buying).

I started by building $200 per month into my spending plan for car repairs. If I had to use it that month, I did. If I did not, it went into a separate account. And let me tell you, that one thing relieved a great deal of stress. It didn’t eliminate it all together because some months I needed more than what I had set aside, but it was a fantastic start. And addictive. As my financial situation improved, I added other expenses to the savings account – kids, pets, gifts, home maintenance, home heating and so on. Now, almost 10 years later, I have a functional, purposeful emergency fund and get great joy from putting money there every pay. Peace of Mind! Priceless!

Emergency Funds Even Out your Spending Plan

This really speaks to the above two reasons and ties them together. Let me paint a picture for you:

You created a spending plan. You follow it month to month. It’s working out pretty well. You’re feeling pretty good about your progress. And then, the car breaks down, or the furnace needs repairs in the house, or the power bill came and it’s $800 instead of $400, or the dog gets hit by a car, or…or…or….

Scenario 1 – you rely on credit to get through those things. The spending plan continues to work, or so you think. Behind the scenes credit is growing. Monthly payments on credit are increasing, your spending plan gets pinched tighter and tighter until it no longer works they way you planned.

Scenario 2 – you do not have credit. That one thing that happens throws your spending plan out the window.

In both scenarios, you say to yourself, “Why do I bother trying to budget. It never works out anyway”.
(One of them just fools you into thinking it’s working and postpones that statement)

Enter the Emergency Fund. It saves the day. It is that important! 🙂

Find Your Starting Point

Meet yourself where you are.

• If you can only save something, it is better than nothing.
• Start with what you can do and get the momentum going.
• Make conscious decisions about where your money is going and treat it like a game.
• How much money can you redirect into your emergency fund?
• Start your fund with windfalls or non-income money like gifts, tax refunds, rebates
• Get rid of clutter and turn that into cash with a purpose

I hope this post has motivate you to either start an emergency fund, fine-tune it or continue it. It really is a cornerstone to any financial plan.

As always,

Wishing you all,

Happy, healthy finances!

Mary Ann Marriott
aka Dr. Debt