Your Emergency Fund is for More Than Emergencies

Homer and Tricia (fictitious names) were doing well. Or so it seemed. Homer had a good paying government job and Tricia was self employed. They had a mortgage on a nice house and were making payments on a nearly new car. They carried credit card debt, but “so does everyone”, they reasoned. Then the unexpected happened: Homer had a heart attack. His prognosis was full recovery, but he would need to miss several months of work. The good news was that he had good health insurance. The not so good news was that he had accumulated very few sick days and even fewer vacation days. And zero emergency fund.

Homer was off work for six months. His income, from his sick days and vacation days, continued for that first month and then ceased. Tricia had to quit working to care for Homer. You guessed it. Once the income disappeared, they quit making car payments and borrowed from relatives, the local bank and all their credit cards in order to eat and make house payments. They hung onto their house, but the car was repossessed. Fortunately, Homer’s job was still waiting for him, but by the time he was able to return to work, Tricia has lost her clients. Her income loss, coupled with swelling debt payments, created a negative cash flow. This debt stress created real concern that Homer might have another heart attack.

This vignette clearly paints the primary purpose of an emergency fund;  if Homer and Tricia had maintained an emergency fund before the heart attack, much of their financial stress would have been a non issue.

Yes, the reality of life is that emergencies WILL come our way. None of us are exempt. But if piling up $15,000 or $20,000 so you can wait for the sky to fall is not a huge motivator, consider the following “side benefits” of your emergency fund:

Better marriage

In many marriages, the very discussion of establishing an emergency fund is a heated one. Why? Because one spouse (normally the wife) needs security while the husband craves the adrenalin rush of living on the edge. Therefore, in order to agree to an emergency fund, the husband must try to understand his wife’s emotions – or at least trust her even if he doesn’t understand her. This communication, albeit testy at times, will bring about a stronger marriage.

Crises become inconveniences

Do you remember that time your fuel pump died just when your house payment was due? And you HAD to have your car running so you could get to work? Crisis. Those times are gone forever when you have the money already set aside. Yes, those events still happen, but your emergency fund makes them mere inconveniences instead of crises.

Save on insurance premiums

OK Guys: if you accuse that emergency fund of not earning its keep, this one is for you. “How?” you ask. By raising your insurance deductible amounts and therefore lowering your premiums. A word of caution: if you are accident prone, stop here and read no further. If not, your emergency fund allows you to be slightly more self insured, which, over the long haul, puts more money in your pocket.

Here are some examples, with generic premium savings from my insurance agent:

• Auto Insurance: raising your collision deductible from $100 to $1000 could lower your premiums by as much as $500 annually. Do the math: if you can go accident free for two years you would save enough on auto insurance premiums to cover the higher deductible.

• Homeowners Insurance: raising the deductible from $500 to $1000 could cut your premiums by $100 a year. In this case, you would need to go five years without a claim to justify the higher deductible.

• Health Insurance: If your family is healthy, you should consider a High Deductible Health Plan (HDHP). You would save substantially on premiums and also take advantage of the tax deferred Health Savings Account. Your emergency fund could allow you to jump start your HDHP instead of waiting until you have saved that deductible amount.

• Extended warranties and protection plans: Your emergency fund will allow you to self insure instead of forking over $5-$10 each month for the rest of your life because you couldn’t afford to repair or replace whatever the plan covers. Saying “no” to protection plans is fun when you are self insured.

Homer and Tricia’s plight is a vivid reminder that your emergency fund is and always will be primarily for emergencies. However, that fund has other benefits: a better marriage, avoiding financial crises, and saving on your insurance premiums are three.

Readers: Do you utilize your emergency fund for purposes other than emergencies? How?