Why Do We Have An Emergency Fund?

James Spencer
Jul 25, 2017 · 5 min read

Growing up I was taught that I should have a credit card available to deal with any emergencies that may occur in life. The 2016 Federal Reserve study found that 46% of American did not have enough money to cover a $400 emergency expense. Somewhere in American history, we went from being a cash is king society to being a society that uses money we don’t have to fund our lifestyle or pay for any emergency that we may experience. We can never gain financial independence if we continue to pull out the credit card whenever a car breaks down or to pay for family vacation we can’t afford. Having an emergency fund is the first step to not living from pay check to pay check.
As a married couple, Mrs. Broke Architect and I only had a few instances when we were living paycheck to paycheck or stressing about if there was going to be enough money to make it to next payday. It’s not that we have always been smart with our money smart; we have made more than our fair share of mistakes. It’s because we have had a fully funded emergency fund for most of our marriage — eight of the twelve years to be exact. During the four years we did not have a fully funded emergency fund, which were the years we were paying off debt, we had one a $1,000 mini emergency fund.
As soon as we were done paying off debt, we saved up for a fully funded emergency fund. Before we saved for the emergency fund, we had to first decide what it should cover and how many months of coverage it should provide. Most financial experts recommend that it should cover three to six months of expenses. This is where a lot of people get confused. They assume that three to six months of expenses is the same thing as three to six months of income. It is possible that they are one in the same, but your expenses should be less that your income. The larger the difference the better. For us, we decided to have six months of emergency saving. Next, we had to figure out what to include in our list of expenses, and more importantly what not to include. Listed below are the items our emergency fund is designed to cover in case of a job lose:
Mortgage
Property Taxes — Ours are not included with our mortgage
Groceries
Utilities
Gas
Electric
Water
Sewer
Cell Phones
Internet
Home Owners Insurance
Transportation Cost
Please take note that following were not included in our emergency fund. If shit were to hit the fan, these items would not be a priority:
Cable TV (TV streaming subscription service in our case)
Entertainment Cost
Clothing
There were times when Mrs. Broke Architect and I could not afford to buy Christmas gifts for each other or for our families. There was a time when I thought this was an emergency situation when you can’t afford Christmas. Because in my family, Christmas is a sacred holiday were we all exchanged gifts no matter what. Going into debt for Christmas was just how we rolled. I knew that my mother would never understand us not sending gifts to the family. So, with great concern and caution, I decided to have a discussion with Mr. Broke Architect about not being able to afford Christmas due to our debt payment. To my amazement she was fine with not exchanging gifts. She processed to tell me the story of how her parents could not afford to buy Christmas gift for her and her siblings one year when her father was laid off of work.
She said that her parents sat the children down that year and explained their financial situation. They told them that love is the most important gift the family could share with one another. Material items could never replace or be a substitute for love. Mrs. Broke Architect informed me that she was never upset about not getting Christmas gifts that one year. On the contrary, she told me that was when you learn the real meaning of being a family and pulling together during tough times. That was the day I leaned that not buying Christmas gifts was not an emergency. Real emergencies have to do with providing shelter, food and/or health care. With that in mind, we proceeded with our plan to not do Christmas that year.
I told this story in order to get you guys to really think about the items you classify as emergencies. Let’s get back to the topic of us having an emergency fund.
Now that we have a six-month emergency fund, we noticed that there are numerous advantages to having it. The largest is the peace of mind we have for being able to handle the various curve balls life throws at us.
Before we finished saving the emergency fund, we had to figure out how to protect it from ourselves. Having access to a large pot of cash can be tempting. Our first step to protecting our emergency fund was ensuring that we do not have easy access to the money. To achieve this, we made sure not to place the emergency fund in the same bank that we do our daily banking. Doing this also allowed us to accomplish our next goal, which was to live our lives without thinking about the money. For the most part, we usually forget that we those funds available to us. That has been the key to keeping our emergency fund intact. The longer we have it, the more we seem to protect it.
Over the years, we have had our fair share of problems that have come up, but we have yet to tap into the emergency fund. It is funny how what we use to consider an emergency is no longer a big deal. Early on in our marriage, when we had a mini emergency fund such as a car repair bill, it was a major issue. Now it is more of an annoyance that we handle it out of our income. We have also dealt with Mrs. Broke Architect losing her full-time contracting job during the recession without using our emergency fund.
As I have said in previous blog posts, having no debt gives us peace mind, but teaming that up with a fully funded emergency fund gives us greater security. Our big concern these days is maxing out our retirement saving and paying off our mortgage before 2023. The great thing about paying off our home early is that once the mortgage is paid off, our emergency fund instantly goes from being a six-month fund to a 12-month fund without adding any money to it.
Having an emergency fund is a critical part of a financial defense system. I encourage all of you to get an emergency fund because it will provide you with more options during the most difficult moments in life and give you peace of mind during the good times.
Remember without sacrifice there is no growth.

The Broke Architect
(-$34,500 negative)

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