Winning With Money Part 3: Self Insure Against Emergencies

19 Aug Winning With Money Part 3: Self Insure Against Emergencies

This is part three of a 5-part series on how to start winning with money. These 5 posts will become part of an e-book I’m writing but I wanted to make the info available ahead of time. Partially because I needed something to blog about,but mostly to share the stuff with you,our readers, so you didn’t have to wait.

Have a savings account for emergencies

Step 3: Self-Insure Against Emergencies

 “It’s only when the tide goes out that you learn who’s been swimming naked.” – Warren Buffet

Life is full of unexpected events and they can cost us a bunch of money. Funerals, home repairs, layoffs or job losses, auto accidents or mechanical repairs, medical bills – they all seem to come out of nowhere and grab us in a stranglehold.

When you live paycheck to paycheck, these sorts of emergencies can ruin your day in a hurry. Most of us are not prepared for financial emergencies, so when they happen we have to reach into the wallet for the credit card and go deeper into debt.

It doesn’t have to be that way. You can be prepared for such emergencies. All you have to do is set aside some money in a separate bank account and dedicate it for emergencies. It’s called an emergency fund, and it works wonders (when you let it work).

I know it’s daunting to think of saving a few hundred dollars, let alone a few thousand, when you’re short on money. But it’s really not that hard, once you stop digging deeper and start being proactive with your money (see steps 1 and 2). With a little focused intensity and effort, you can save up some money pretty quickly.

Admit it – if it’s really important enough to you, you can sacrifice a little and save some money, can’t you?

Of course, you could just buy some insurance for some of these types of events. For instance, you can buy short-term disability insurance, lower your deductibles on your house and cars, pay higher premiums for lower deductibles on your health insurance, purchase supplemental health insurance, etc. But you’re going to pay quite a bit in extra premiums to cover every emergency. And guess what? You’re still going to have extra expenses that aren’t covered by the insurance.

When you’ve built up a good emergency fund equal to 3-6 months of your household expenses, you’re effectively self-insuring against a variety of financial emergencies. You’ve now got the cash on hand to handle the expenses from these events without worrying about going deeper in debt.

Let’s give some examples here. With 3-6 months of expenses sitting in a bank account (somewhere between $10,000 and $20,000 for most families), you can lose your job and have six months of leeway to find a new job. When you have medical expenses, you can cover the deductible plus your 20% of the expenses. Better yet, you can save money with a high deductible plan and be confident you can cover the deductible.

With a 6 month emergency fund, you can get hurt on the job and have your own short-term disability policy in effect. When the car breaks, you can either fix it or replace the whole car. When the roof leaks, you can replace the whole roof and confidently search for contractors based on quality of work, not availability of financing.

Perhaps most importantly, when you’re self-insured with an emergency fund you have peace of mind and the ability to sleep better at night. Think about the causes of stress in your life. Financial issues tend to be one of the top sources of stress.

Would you sleep better knowing you won’t have to go into debt if an unexpected event happens? If you answered yes, I strongly recommend you build up an emergency fund. If you answered no, are you in denial or just a free spirit?

It’s not a question of if you’ll need an emergency fund. It’s a question of when.

  • Barb Friedberg
    Posted at 09:45h, 19 August

    I totally support this premise. Having just completed a harrowing cross country move, several months of respite from monthly paychecks and a few nights of vacation along the way by using our savings and side hustle checks, we used NO DEBT! Money in the bank = security.

    • Matt Wegner
      Posted at 11:21h, 19 August

      I agree Barb. Security is a good thing, especially in uncertain economic times. That so awesome that you moved without debt. You’re on my list of super cool people now. Oh, wait. You were already there!

  • shanendoah@Baking the Budget
    Posted at 09:59h, 19 August

    Our emergency fund got a bit of a work out earlier this year.
    One of our dogs was diagnosed with cancer in March. We were able to make the decision about what kind of care to go with based solely on what was right for our dog. Money wasn’t a factor.
    Then, in May, my grandmother died. My brother and I are the only truly adult grandchildren, and he lives in Australia. The family kept saying I didn’t need to come back for the funeral, but the emergency fund meant I could without a thought. Would my family have been okay if I hadn’t flown across the country on short notice? Of course they would have, but it meant a lot to them (and me) to be able to be there. The EF made that possible.
    The important thing to remember that once you use EF funds, you still need to tighten your budget a bit in order to build that balance back up so that you’re ready for the next emergency.

    • Matt Wegner
      Posted at 11:19h, 19 August

      Yes, you absolutely have to cut back a little to rebuild the emergency fund as quickly as possible. Definitely worth it though. Our emergency fund has been getting a lot of use lately too.

  • Travis @DebtChronicles
    Posted at 23:38h, 19 August

    Given the size of debt I’m trying to pay off, I think that having a 3-6 month emergency fund is a bit out of reach. If I could save up that much money, I could just about pay off all my consumer debt. 🙂

    That being said, I totally agree with the positives of having an emergency fund. Too many times over the last few years have we had a large unexpected expense for which we’ve had to scramble in order to handle….

    • Matt Wegner
      Posted at 19:57h, 20 August

      Exactly, Travis. I usually recommend getting a small emergency fund in place, then paying off your debts as quickly as possible so you can free up more cash flow to build up a full emergency fund more quickly.