As like any other morning, I stepped into the shower and turned the faucet to “medium / hot.” My perfect setting. But unlike other mornings, I was shocked to find that the water wasn’t heating up!
Did the kids use up all the hot water last night??
I am a spoiled middle class American! I don’t know how to take cold showers!!
Seriously, why isn’t my water getting warmer?!
After coming to terms with the fact that it wasn’t going to heat up, I begrudgingly endured my body through a quick cold shower and called a repairman to take a look at our water heater. Once he had a chance to conduct an assessment, he turned to me and said “Yup, this one’s a goner. You are going to need a new one.”
“How much?” I said. With a quick thought he said “well, you can probably grab one for around a thousand.” and he added “you want to go to Home Depot now? We can toss it onto the back of my truck and you can just pay me for the installation.”
And a thousand dollars like that! We spent the rest of the morning hauling and installing the new water heater.
How many of us have a similar story? Replace the water heater with a busted tire or overflowing toilet. Such “emergencies” do and will continuously happen.
That’s why in this post I want to share with you the importance of having an Emergency Fund worth 3-Months of Expenses!
1) Why You Need An Emergency Fund
How many of us or know of someone who have experienced the following?
+ A car accident
+ Job search struggle
+ Unexpected repair
+ Illness or death of a loved one
The probability of a personal catastrophic event is not if, but when.
Water heaters WILL break unexpectedly and someone that we love WILL get sick. In my story about the water heater, I was surprised when I found out that I needed a new replacement. Especially when I found that it would cost me a thousand dollars! But thankfully, because we had an emergency fund saved up it ended up being a minor nuisance instead of a financial disaster.
However, not all people are in a similar situation.
According to Bankrate’s latest financial security index survey, more than a third, 34 percent of American households experienced a major unexpected expense over the past year. However, only 39 percent of respondents said they would be able to cover a $1,000 expense from their savings.
The second most popular answer, with 19 percent of respondents, was using credit card to cover their emergency expense and paying it off over time.
“While tapping savings to pay off an emergency was the most common response, more than a third of Americans would sink into one type of debt or another, potentially harming their financial security,” – Bankrate
This is scary statistic. I challenge you to not be the majority. Prepare your finances so you and your family can weather emergencies that WILL happen.
2) How Much You Need – 3 Months of Expenses
I recommend you save at least 3 months of expenses. If more the better. But this should give you enough cushion to weather most common emergencies (i.e. broken water heater, fender bender, etc.). Take your average spending in a month that would cover overhead expenses (rent, insurance, food, etc.) and well as some discretionary expenses (clothes, eating out, etc.) and multiply by three.
Another recommendation is that you want your money to be accessible. The financial terminology is “liquid.” The best option is a simple savings account or a money market account. Don’t worry about the interest rate. You aren’t trying to make money from this account. You want to weather unexpected emergencies without derailing your overall life plan.
3) I Want To Be Ready When…
Having an emergency fund is a smart and sound decision. It makes sense from a very logical perspective. However, longer my wife and I have had it, we noticed that it provides tremendous emotional benefit as well. Emotional health is crucial to overall physical health. By having this financial “cushion,” whenever unexpected events happen, we were able to calmly respond with “oh well, that sucks,” rather than “oh my goodness! What are we going to do!?”
Having aging parents that live with us, I’m constantly bracing myself for the day that one of my parents will become severely sick or incapacitated to a point where they will need more hands on caring. I can never predict when and how, but I know that it will come one day.
The emergency fund helps me to find some level of peace in that thought. If worst comes to worst, and one of us had to quit our jobs to be more available at home supporting my parents and the kids, it wouldn’t be easy, but I know we can weather that storm together.
Do you have an emergency fund? What emergencies do you want to be prepared for?