Last week we had to dip into our emergency fund twice: once to pay the insurance excess on the sewage damage to the house ($500) and then to pay for my laptop to be fixed ($300).
The broken laptop was an inconvenience, but very minor in the scheme of things. The price tag for repairs brought a tear to the eye but it could have been worse: we could have been forced to rely on credit or we may not have had the funds to repair it at all.
The sewage flowing into the living room wasn’t much fun either, but it too could have been worse. Inconvenient, icky, smelly, but again, in the scheme of things, not that bad.
But I want to talk about why an emergency fund makes life easier. Having an emergency fund meant we had no added financial stress on top of the ick and inconvenience.
In the recent reader survey I asked you what it means to be ‘thriving’ and many of you wrote about living with less stress. Having an emergency fund is just one way to reduce financial stress.
So how do you create an emergency fund, particularly if you’re trying to pay the bills, pay off debts and save for more tangible things (potential future emergencies are hard to visualise and predict, which means it can be difficult to find the motivation to save for them)?
First, the foundation of an emergency fund is adequate insurance. In nearly ten years of having insurance, this is the first time I’ve ever had to make a claim, and boy am I thankful that I have it. This week, insurance has been well worth the yearly expense. When things go wrong, insurance is your emergency fund.
You will often read articles on how to save money on insurance premiums and that’s great, but it is just as important to make sure you are adequately covered. It is common for people to be under-insured. If you never have to make a claim then sure, you’ll save money on premiums. If you do have to make a claim, being under-insured can make things pretty miserable. The thing about insuring against future risk is that you just never know whether you will ever need to make a claim.
You can create a balance between saving on the insurance premium and making sure you are adequately insured by increasing your excess. We have a higher than minimum excess and for a couple of extra hundred dollars at claim time we have saved ourselves in premium costs over the years. But again, the savings depend on how often you have to make a claim and it’s impossible to predict future events. If you’re going to increase your excess (or even if you aren’t) put aside the excess amount so that you have it, should you make a claim. This is where your emergency fund comes into play.
Our emergency fund paid for the computer repairs and the insurance excess. If we have to wait for the insurance money and we want to buy replacement items in the interim, the emergency fund will come in handy then too. And if the insurance company decides not to pay our claim well, we’ll be angry, but still partially covered by our emergency fund.
To build an emergency fund, start by putting aside a little each payday into a separate account. Make your life easier and automate the payment. Even a couple of dollars is better than nothing.
Just say we had only managed to save $100 in our emergency fund. That’s $100 less to pay off the credit card as well as not having to pay interest on that $100. It might not cover the emergency, but it makes things that little bit easier financially.
If you’re trying to balance saving for an emergency fund with paying existing bills and debts, then I’ve outlined a strategy for getting on top of it all with minimum fuss and pain in a free eBook, which you can find here. Some argue that it’s more important to pay off debts before you start saving for an emergency fund but I disagree. If emergencies and bills are continually paid for with credit, then you may never pay off your debt and you could end up paying more interest in the long term compared to what you pay if you put a little aside each week to cover future emergencies.
Sometimes poo happens and we have no control over it. While it sucks having to use your savings on insurance excesses and repairs rather than fun stuff like holidays, it would be much more stressful not to have the funds to cover these unpredictable events.
If you don’t have an emergency fund, why not start one right now? Log onto your online banking and set up an account and automatic transfer (it will only take a minute) and that’s one thing done today that will make life easier in the future.
What are your tips for saving for emergencies?