Why You Need An Emergency Fund
If you’ve ever read anything on personal finance or financial planning, you’ve probably heard of an emergency fund. Typically the first step in getting your finances in order is to establish a fund where cash is accessible for things that we don’t plan on happening to us. Things like a job loss, a disability, and more. The topic is certainly at the top of the agenda when we meet with clients. Why? Because we’ve seen the power of the emergency fund help people when they think all is lost. Below are three real life client stories where an emergency fund has come in helpful and the client has been thankful for it!
Scenario 1
A client messaged me last week notifying me that he’d been laid off and needed to stop making deposits to his emergency fund. There is never an ideal time to be laid off from a job. The bills don’t stop arriving just because you no longer have an income. But, this is the exact reason we set up an emergency fund in the first place. This account gives our client a little bit of a financial cushion. There is money there to pay bills for the next few weeks while he finds a new position.
Scenario 2
This second scenario was a client who decided it was time to get out of debt. We set up a plan to aggressively pay off credit cards, but wanted to establish the savings habit at the same time. There is much debate over paying off debt vs saving for an emergency. One side argues you save more money if you put all your money towards debt, the other side argues, the hardest part of saving is getting started, so start as soon as possible. I’m a fan of the latter. I also believe in the power of an emergency fund. There is nothing worse than the intent of becoming debt free, only to get close and have an emergency arise where you need to rack up the credit cards again. In this scenario, the client got a speeding ticket and didn’t have much extra cash in his bank account. Instead of using his credit card and paying high interest fees, he used some of his emergency fund. To this day he continues to contribute to his emergency fund until it’s at a level he’s comfortable with, but avoided going back into debt in this circumstance.
Scenario 3
In the final scenario, our clients were in the middle of the home purchasing process and closing costs and set-up fees (cable, hydro, mail forwarding service) started to creep up a little higher than expected. This scenario wasn’t necessarily an emergency, but the clients took some money out of their savings, just in case and for peace of mind. Knowing they wouldn’t be strapped for cash from the get-go has helped them sleep at night. With each pay cheque, they are topping up the emergency fund and plan to re-deposit any money they don’t need at the end of the process.
Some of the scenarios are emergencies, some not. But at the end of the day, having some back-up cash helped out in all of the three situations above and goes to show the power of the emergency fund.