Human nature being what it is, we just don’t want to admit that there will be a need for an emergency fund. But life, being what it is, deems otherwise. Now that the budget has reached acceptable standards in our financial planning, it is wise to acknowledge the possible need for an emergency fund.
Some well-known financial planners recommend that you allow as much as eight months salary in an emergency fund, but the fund is not a one-size-fits-all. The amount you need varies according to your lifestyle.
If you own a house, your emergency fund should be much more than if you are renting. The owner will be required to replace the water heater when it explodes or have trees removed from the property if a tornado blows them down.
Be warned that most homeowner’s policies do not cover the full cost of such happenings. Carefully check your homeowner’s policies to see how much you can expect to have to work with in case of such household emergencies.
If the hot water heater springs a leak and the entire lower floor of your home is flooded, how much money will you have to work with in order to repair the damage?
If your line to the city’s main sewer line has a root growing in it and you are flooded with raw sewage backed up, how much will your insurance pay? Chances are very good that this amount will not be enough to cover the cost of repairs.
What if the motor falls out of your vehicle?
These are examples of why you need an emergency fund. Think of other instances such as your roof blowing off or your house or your deck being infested with termites where the fund would be needed.
It is important to understand what an emergency is and what it is not. Two things that should not be considered as an emergency are food and clothes. A matching pair of shoes to wear with a new outfit or a classy shirt may seem like an emergency, but these are definitely not emergency situations.
While Bita is openly against credit card use, she does admit that the credit card is (or can be) a useful tool in budget planning, but only if you are disciplined enough to handle it.
In today’s plastic society, it is almost impossible to navigate without at least one credit card. The holder must realize that it is not acceptable to substitute a credit card for an emergency fund – these are two very different items.
A card is necessary in order to rent a car or reserve a hotel room; therefore, our financial well-being requires that we have at least one credit card. This card should be used only when required and the balance paid when due.
If renting a car or a hotel room is not something you do often, make a small purchase using your credit card and pay it off as soon as the statement comes. Some card companies cancel inactive cards.
If you are disciplined and never carry a balance, the card can be very helpful in keeping up with expenses, especially if you are repaid for these expenses and are required to submit a bill for them.
Use the credit card to track expenditures. Use the card for food items only such as grocery store or warehouse purchases, not eating out. This will give you a very detailed summary of where your food money is going.
Make a list of things you may anticipate as being an emergency and realistically set a goal for your emergency fund. The beautiful part of this is that if you don’t have an emergency, you are all that much better off. Being better off is a good thing.
Bita Bullet is the pen name of a local anonymous writer who can be reached at email@example.com