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April 2008 |
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The Case For a Plain, Old, Boring Emergency Fund Financial planners frequently plead, urge, and lecture their clients into building an emergency fund. But too few clients follow through. With the Commerce Department continually reminding Americans that the average personal savings rate is less than two percent, perhaps this shouldn't be surprising. All the money in the world  People just don't get excited about squirreling away $3,000 or $5,000. But really that should be the most exciting money they ever make. For many saving up an emergency fund can mean the difference between a negative and positive net worth. Also, an emergency fund is a first step toward financial freedom. That's exciting stuff. If you ever hear a millionaire talk about his or her financial success, they rarely mention the $5,000 they earned that put them over the $1 million mark. No, they always talk about the first commission they made selling knives door-to-door or closing their first big deal. And they always say the same thing: "At the time, I thought that was all the money in the world." It's not "just sitting there" Buying a home is an exciting experience. You get to invest in your future and you get to make a purchase. Most will agree an emergency fund is an investment in your future that simply lacks the thrill of buying something. Most see the importance of saving for a rainy day, but they also see it as just saving a bit of money and then it sits there, waiting to one day go toward a new water heater or a major roof repair. But that's not the whole story. An emergency fund isn't just sitting there. In fact, it's doing all sorts of things. An emergency fund, enables you to take a larger deductible on your car insurance (see this month's Saving Section) because you know you can afford the deductible. In fact, if you're driving an older car, an emergency fund enables some to get rid of their collision insurance because they can afford to replace a $4,000 car if it's ever totaled. An emergency fund also pays you back interest that might otherwise go to a credit card company. Suppose at month's end, you're facing a bigger credit card bill than you normally would like and the dish washer breaks. You can replace the dishwasher using your credit card and then pay the entire balance with your emergency fund. Then "pay back" your emergency fund instead of the credit card, avoiding a 15% interest rate. Saving 15% on your money is pretty exciting. Realize more opportunity Emergency funds seem like the safe path, but really they enable people to take more chances. If your company is moving out of state, an emergency fund makes it easier to say, "No, I'm not moving my family." Or, if you want to move to another state for a better opportunity, having the money for the move might put the opportunity within reach. An emergency fund can open all sorts of doors. Just try to control your excitement. |
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