Emergency Funds vs Unplanned Expense.
I’ve been reading a few threads and would like to point out some things.
A unplanned expense (emergency expense) is one of those things that happens, sometimes more often then desired, and results in short term expenses that exceeds normal budgetary constraints. Unplanned expenses are singular events that are quickly recoverable. Examples of unplanned expenses may include a leaky roof, unforeseen car repairs, accidentally breaking a window, getting a $500 speeding ticket, posting bail for not paying the speeding ticket, etc. They are part of life, we don’t like it when they happen, but they are manageable and quickly recoverable.
An emergency fund is part of a medium to long term financial emergency plan. An emergency fund is created so that when life kicks you so hard in the face that you can’t see straight for 6 months, you have some money to fall back on. Emergency funds help you survive the real disasters of life. Example of when you would use an emergency fund: get laid off, short term disability, providing shelter if your home is destroyed in a natural disaster, medical emergencies, etc.
If you’re single, have family to fall back on, and/or live in an apartment; a three month minimum emergency fund will probably due. If you have dependents and/or own a home, you want to have at the very least an emergency fund that covers all your basic “essential” expenses for six months. Ideally, you’d have an emergency fund that covers your net pay for one year.
A lot of people think that they can fall back on debt as their emergency fund. Debt makes a great short term solution. However, when debt expenses grow into the tens of thousands over months and years, it’ll only worsen the situation. Can you imagine putting $10,000 to $30,000 on credit cards to pay for your basic living needs? How do you begin to pay that off if you can’t even pay your normal day to day expenses? This is why many people go bankrupt.
A lot of people argue that their home is their “emergency fund”. They’ll take out a home equity loan to cover their expenses. I have one word this argument: “Katrina”. How do you take out a home equity loan when your home, your job, your life is washed away? You can’t. Everyone saw what happened with Katrina. Who do you think survived it the best? It was those people with an emergency fund. They are the ones that could move to a new location, pay for an apartment, and look for a new job to help them get back on their feet. They are the ones that will get started first on rebuilding their lives. They don’t have to wait for bureaucratic insurance companies and government agencies to calculate what claims will be honored and what handouts should be given while they live in a shelter with 1500 other people.
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Re: Emergency Funds vs Unplanned Expense.
