Life Always Wins, No Matter What
If you are at all like me, you are very eager so save your money and invest for some big dreams that you have in your life. It's really exciting to imagine yourself saving up for a fun vacation, purchasing your first home or reaching financial freedom, but sometimes on the way to these goals we forget that things don't always go according to plan. In fact, things never go according to plan. Every now and then something happens that gets in the way of everything else that you had planned, and it's even worse if you find yourself unprepared. Even though it's a relatively boring concept, you should always prioritize having an emergency fund over all other financial goals.
What is an Emergency Fund?
The size of your emergency fund largely depends on your tolerance for risk. If you are an extremely risk averse individual, you may find it practical to hoard a year's worth of cash in your mattress; in this case you'll probably never have to worry about a bad experience cleaning you out, but your money will sit idle and lose value to inflation. But, even if you are an optimist who expects nothing to ever go wrong, you should keep a modest cushion of funds that can be accessed easily. Again, a modest cushion will take a different meaning for everyone, but generally it should be enough to cover some sort of urgent expense like a broken down car or living expenses if you unexpectedly find yourself out of work.
My Own Emergency
As I've gotten into the realm of financial blogging I didn't really think all that much about the importance of emergency funds until I had my own mini emergency. I've focused so much on saving for a downpayment on a house that I only thought to put $50 each month into an emergency savings fund. I thought "what could possibly go wrong and deplete this fund?" Well let me tell you, $600 is not really that much money!
GO TO THE DENTIST
Yikes!
Yes, my emergency was the dentist. You see, I've always had a fear of the dentist and I avoided going for too long. By the time I did get around to seeing a dentist - last month - it turned out that I had several cavities and fixing them all would cost me $2,000! I was so mad! $2,000 for my teeth! This seemed ridiculous. But this is real and unfortunately I cannot control the cost of medical care.
I really thought that this unexpected expense would get in the way of my downpayment fund that I had been working so hard to build. Luckily, my tax return plus my meager $600 will be enough to cover the dentist and I won't have to touch my other savings; but without the great timing of tax season, my home savings would be set way back. So yes, even I was caught off guard with a random annoying emergency.
Make Your Money Accessible, But Not Too Accessible
The other important piece of advice that I have regarding emergency funds is to make sure that you can access the money, but make sure that it's at least a little bit difficult to do so. My emergency fund was at one point synonymous with my regular savings account, and before I began practicing my frugal habits, I raided this fund to pay for Christmas gifts, not expecting my upcoming dental problem. So I would suggest putting the money somewhere that is a bit further away from a quick online transfer! If you are really sophisticated, you could ladder your savings in CDs that can be cashed out at various points in the future, but that's a topic for another day!