Everyone Needs an Emergency Fund

financial planning

I read a great article, linked above, that discusses the reach of wise financial planning. Oftentimes, it is assumed that athletes have little or no financial worries, but the recent rumblings surrounding trade agreements and lockout talks have dispelled this myth. Interestingly, every individual or organization is bound by the same financial principles, even Congress. Setting aside money, no matter how high your income, as always a wise move. Granted, professional athletes deal with larger dollar amounts and are more likely to purchase luxury items, but this is all the more reason to plan for lockouts or changes in contracts that have a negative impact on income. I imagine that even Warren Buffet has money set aside for emergencies. In thinking about emergency funds, I thought about what the key factors are to make an emergency fund work.

financial planning
financial planning

Set Up Parameters for Emergencies

Evaluate what is a bona fide emergency and warrants a dip into your emergency fund. Many emergency funds don’t work because there are too many “emergencies”, shoes on sales, latest gadget upgrade that you didn’t see coming, collectibles at a yard sale or a new dress. Worst are the purchases that should be scheduled on your budget rather than consumed through the emergency fund. Examples include oil changes, new running shoes, new software, etc. Bottom line is that many purchases can wait or should be planned ahead of time. Car tires are expected to wear down, windshield wipers eventually have to be replaced, every 3-5,000 miles you will need an oil change so do yourself a favour and plan for these items and stay away from your emergency fund.

Replace Your Credit Card with your Emergency Fund

The most common excuse I hear for keeping a credit card is to use it for emergencies. My most common retort is to use the emergency fund the same way. Say you have a $5,000 limit on your credit card and your water heater goes out and you use your credit card to get it repaired. Whatever amount you use to pay for the water heater then, theoretically, you promptly make payments to pay back the amount owed. What if instead you built up a $5,000 emergency fund and replenished it the same way you would with a credit card. Sure you don’t get your reward points, but you also don’t pay any interest and you avoid late fees.

Control Access to the Emergency Fund

You don’t want to access your emergency fund as quickly as you access loose coins in your pocket, but at the same time you don’t want to have to melt a block of ice to handle your emergency. The best method is to set it up in a liquid account like a money market account or a free checking account. Avoid putting the money into a certificate of deposit or any long term best investment plan account. Make sure it is available when you need it.

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