Before I started this blog a few months back I contacted a few personal finance bloggers and asked for some advice. One such blogger (Charles from the Getting a Rich Life blog) had the following comment:
Ok – he didn’t provide this picture, but this is what I envisioned…
So, over the last two months I decided against posting an article on why you should have an emergency fund. What’s interesting is that as I continue to learn via other bloggers and my own reading I too have developed a dislike for emergency funds. Why? They are highly impractical and so are we.
The idea behind an emergency fund is to have access to a certain amount of money should a situation arise: you get sick and can no longer work. You are laid off. The roof caves in. A family member needs financial help. The list goes on and on. Some advisers suggest an emergency fund should be set up to help you in these instances.
I can’t think of a single time in my life when I encountered an emergency that required a large amount of money right away. Sure, I may have written a few NSF cheques in my university days when money was tight, but other than that things have gotten along pretty well without having a stash of money in my flower bed. It’s true I have been blessed with a fairly emergency situation-free life but even still, I don’t think my story is a unique one.
“But this IS an emergency…”
What tends to happen more often than not with emergency funds is they are used towards imaginary emergencies such as vacations to the Bahamas to de-stress from a near fatal hectic work month or buying a new car because the old one had some rust on it. When we have access to these emergency funds for a long period of time, and no dooming emergency comes along, we subconsciously realize the world is probably not coming to an end so we might as well live it up with this emergency fund.
I’m all for living today, in fact I enjoy it quite a bit, but not at the expense of tomorrow’s living. While emergency funds have very sound financial intentions, our spending habits tend to get the better of us in the long run.
Most of our unforeseen emergencies are covered by universal healthcare and workplace benefits. Life insurance and disability insurance is also a must for all those with families (more to come on this soon). These safeguards cover the majority of catastrophes that I can think of, aside from losing a job.
To me, the best way to mitigate the risk of the loss of your job is to manage your current lifestyle. Don’t put yourself in a position where the loss of income for a while will put you over the edge. If you are currently saving and investing a good chunk of your income you’ve already got an emergency fund, so don’t bother tying up additional cash in low-interest yielding bank accounts. Conversely, if you don’t have an investment portfolio and are currently paying off debt instead, it makes no sense to worry about a horror that may never come while the real-life horror story is the interest you’re already being charged! In Canada we have access to employment insurance to cover situations like these. While this may require a pay cut for most, if your spending is in check, you hopefully can manage.
Let me know if you think I’m missing any emergencies or if I’m not being cautious enough. I’ll be interested to hear other peoples take on my anti-emergency fund stance.