Tuesday, March 18, 2008

The Advantages Of An Emergency Fund

You never know an emergency can occur. And when it does, you don't want to be struggling to find cash. You want to be able to reach into your emergency fund and pull out a few thousand dollars at a moments notice.

A few weeks ago, my wife wrecked her car. This seems to be a regular occurance, every 36 months. I found out several years ago that having a low deductible on your insurance isn't cost-effective. Your annual auto premiums are much higher, and if you don't have an accident every other year, you'll eventually end up paying more in premiums than you would have for the deductible.

Based on that premise, I've set the premiums for collision on our auto-policy at $1000. Since the accident was judged to be no one's fault (of course, it's hard to believe that my wife couldn't see a 30 foot truck and sideswiped it), we liable for our $1000 deductible. Oh no!

So I dropped off the car in the body shop and picked up a rental for my wife. About a week later, I got into an accident, which I admit, was completely my fault. I've been driving for 15 years and this was the first accident I've been in. I was day-dreaming. Sadly, that another $1000 for the deductible. $2,000 down the drain!

In all, we're facing $2000 worth of unexpected expenses in the past 30 days. If we didn't have a large emergency fund, we'd be strapped for cash. Pretty much like those poor people who need access to payday loans. You need money in an emergency and then you get sucked into those loans. Of course, if you're smart you'll borrow money on Prosper instead of getting a payday loan. It's always a good idea to have a couple of months worth of living expenses handy in case of emergencies!

Even if that means postponing your big-screen TV or ATV purchase! Fund your emergency account first!