Your Emergency Fund Needs to Be Bigger Than You Think

A couple of weeks ago I wrote about how the “Emergency Fund” should really be called something else, since so few financial events are really emergencies. Regardless of what you call it, you need to be setting money aside to cover car repairs/replacement, appliance replacements, home maintenance, medical expenses, and all those pesky problems of life.

The thing is, we often fall into the trap of thinking that we “only” need to save enough to cover the problem. We think that if we have enough to cover the car repair, buy a new car, replace the roof, replace the air conditioner, or pay the medical bill then we’re all set. Unfortunately, most financial “emergencies” end up costing more than the cost of the problem itself. Sometimes significantly more. Here are a few examples:

Car Problems

If your car dies or reaches the point where repairs are no longer cost-effective, you need to replace it. Unless you’ve already picked out what you want next, the smart thing will be to shop around, compare prices, read reviews, and do a lot of test driving. This is going to take time. In the meantime, unless you have another car handy, you’re going to have to take public transportation or maybe rent a car to drive for a couple of weeks. While you might have a savings account with $10,000 to cover the cost of a decent used car, do you have enough to also cover the cost of a few weeks worth of car rental or public transportation?

Medical Expenses

If something serious happens to you (or even if it’ s not that serious, but incapacitating, like a broken leg or arm), the cost of your medical treatment is going to be only a part of the expenses you’ll face. You may have to pay for more meals out (or delivery) if you can’t cook. You might have to pay for childcare if you normally stay at home with the kids but you can’t care for them because of your medical problem. You might have to hire a cleaning or yard service to handle routine chores for a while. It’s great if you have a few thousand socked away to cover the medical payments, but you need more to keep your life running while you’re down.

Appliance Replacement or Repair

If your air conditioner or heater dies on the hottest/coldest day of the year (and they will because I believe they wait for those days), it may take a while to get a replacement up and running. Between gathering quotes, doing some research about what you want/need next, and waiting for an installation or repair crew to become available, you could be without heat or AC for a few days to a couple of weeks. If you can’t crash with family or friends, you’ll probably need to go to a hotel. If your fridge dies, you not only have to wait a few days to pick out a new one and have it delivered, you’ll have to replace the food you’ve lost and you’ll probably be eating out non-stop for a few days. Can your savings absorb not only the cost of the appliance plus the other costs?

Natural Disaster

While your insurance (ideally) will pay for you to live somewhere else if your home is damaged in a natural disaster to the point you can’t live in it, you may not get the money right away. Do you have some savings that you can use to get into a hotel? Your insurance may only pay for the hotel while your house is repaired; you might have to pay for all of your meals. Do you have enough saved to pay for three meals per day for a couple of weeks, or longer? Even if your living expenses are covered, if you’re without power for a few days, you’ll lose the contents of your fridge/freezer. Can you replace that food? (Some people file this sort of thing on their homeowner’s policy, but I don’t recommend it because you’re going to have increased rates for something that isn’t that big of a deal.) Your homeowners’ policy might be great, but it won’t cover everything.

You might find that other sorts of events have their own extra costs associated with them. It’s rarely as simple as just paying for a new car or appliance, or letting your insurance handle all of the medical payments. There are often expenses that you have to pay that you might not have prepared for. Sure, you might be able to float reimbursable expenses on a credit card, but if the insurance company doesn’t cough up the money before the bill is due, you’ll end up paying interest. When your establishing your emergency fund, make sure you add in extra to cover the collateral costs that these kinds of events bring with them.

(Photo courtesy of swimparallel)