April 5, 2010

Why A $1000 Emergency Fund Just Isn't Enough

I read a lot of books and blogs and websites about personal finance. A lot of "experts" say that you should have at least a $1000 emergency fund in place while you pay down your debts. When Ben and I were talking about our budget the other day I mentioned this and said that I really was not comfortable with a $1000 emergency fund and he agreed (ours is larger than that). One thousand dollars really won't protect you much these days. It's a nice idea, and hey it's really better than not having anything. But here's why I think people should work on building savings as well as paying off debt.

Unemployment: What happens if you lose your job? The usual time for one to find a new job was about 3 months. That has grown even longer now that the economy is in such a desperate state. How is $1000 supposed to last you 3 months or more? Our current house payment is $700 - that includes P&I, home and mortgage insurance, and property taxes. So if something happened and we had to use a $1000 savings as "income" that would leave us with $300 after housing to disperse to utilities, food, car expenses, insurance, etc. Not going to cover it. And what about the next month? Even when we were paying $625 for rent in our first tiny little loft that wouldn't have left us with much. Most people suggest 3-6 months worth of expenses (not income) as an emergency fund. I agree.

Medical Emergencies: If you are lucky enough to have insurance, you will have a deductible or an out of pocket expense to pay when the need for medical care arises. Our current insurance states that we have a $2500 OOP expense per person per year. $2500 - $1000 still leaves $1500 that we would have to pull out of our butt if all we had was a $1000 emergency fund. Some people's OOP are not that large, and some are even larger. But either way, $1000 will not cover you in most cases of a serious injury or illness. And let's not even get into what it would cost if you aren't insured at all. I would suggest that you have the amount of your deductible/OOP stashed away in savings for such an emergency. The term "Better safe than sorry" really applies here.

Vehicle Emergencies: This one is very similar to medical emergencies. Your insurance policy will have a certain deductible that you have to provide before they cover anything. But that's usually just if you have an accident. So if you're driving along and you don't hit anything/one but your transmission decides to take a dive, guess what. You're going to be paying more than a grand to fix it.

Natural Disasters: Earthquake, hurricane, flood, etc. In a 30 minute time slot people have seen their whole lives turn over and disappear. If you have start over completely do you think $1000 is going to cover it?

Death: I pray that none of you ever have to use an emergency fund for this because you will all be well over 90 before you pass on. But let's hypothesize that you and/or your loved ones get into a car accident and someone dies. Or there is a house fire and one of you doesn't make it out. It's a really horrible thing to think about, but if it were to happen funeral costs can rise well over $3000.

"Ok, that's cool but how am I supposed to come up with extra money?" Some people don't even have $100, let alone $1000. If you're trying to come up with any kind of emergency fund but can't figure out how, here's some ideas.

Cut back - See if you can squeak anything out of your budget. Do you have any extras or luxuries you can cut out for a period of time while you build up a safety net? Wouldn't you rather go a few months without cable, or that Extra Chocolately Mochacinno you love so much if it meant you could sleep easier at night? Or you could even do something as simple as turning off the light when you leave the room. Transfer that utility bill difference to savings.

Keep That Change - I wrote about it here and you can do your own version. Or set up a change pot on your dresser. Once a month take it to the bank and deposit it in savings.

Sell Stuff - Got any books you don't read lying around? Games? Electronics, musical equipment, appliances, furniture? There's many resources for getting rid of unwanted stuff and making money. Yard sale, eBay, Craigslist, or just getting the word out through friends and family that you're looking to sell it.

Save Those Windfalls - Tax returns, birthday/holiday money, inheritance, bonuses, overtime. You will most likely get extra money a few times a year. I would highly suggest you put it in savings, especially if you're hurting for a cushion. That shiny new toy can wait, can't it? And once you have what you consider to be a comfortable savings, then the next batch of extra money can go toward that 62" plasma you've been wanting so bad. 

In the end there really isn't an excuse not to have more than $1000 in the bank to cover you in the event of an emergency. If you can buy a soda from the vending machine at work every day, you can put it in savings. And if, heaven forbid, the need arises, you'll be much happier you sacrificed a little back then to cover you now.

1 comment:

Farm Girl said...

Like I said, very wise Megan. I think it would all work, any of it. One thing you forgot to add though, is weddings. :) They sneak up on you too.

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