Thursday Trim the Trash: September 28, 2017
5 Things That Happen When You Don’t Have an Emergency Fund
The logical reason for having an emergency fund is to help you out when you have an emergency. Seems simple right? The actual consequences are a bit more drastic than not being prepared for an emergency. I’ve spoken to the importance of having an emergency fund many times before and let’s get real, I’m not the first. Personal Finance Gurus like Dave Ramsey base much of their teachings on creating emergency savings. My own idol, Gail Vaz-Oxlade, has written many books about the importance of being debt-free with emergency savings. With all these people hollering about the importance of emergency savings, why is it that many people still don’t have any. Remember on Monday, I mentioned that a quarter of all people have little to no emergency savings. I think the main reason people don’t have savings is that they are unaware of the consequences of not having them. I, having been in a position where having savings would have helped me dearly, can speak to this topic with authenticity. In this post, I am going to describe the consequences of not having emergency savings and what it could do to shape your financial outlook.
Negative cash flows kill monthly/weekly dreams
You work hard all week and finally get a chance to relax. It is only then that you realize that you have no money. Actually you might have realized that earlier in the week, but nonetheless, you are broke. Having an Emergency Fund strictly for positive cash flow is key. I like to call it a slush fund. This is money you have put aside so that you don’t miss out on the weekend. You can enjoy the barbeques, Friday cocktails after work, buying groceries, filling up the gas tank to go on a weekend getaway, etc. I make sure I have about $1000 in my slush fund that I use and replenish on a regular basis. This money comes off the VISA and goes back on it immediately so I never carry a balance. Think of it as an emergency fund for fun. If you don’t set aside a little money for life, you will either go into debt or miss out. That leads me to this point:
Debt
Those without emergency funds accumulate debt on the regular. Any little thing that happens is a crushing blow. Broken windows, car repairs, new computer for work, traffic ticket, sick off work for a week, broken water heater, grandma’s lawnmower dies, the dog breaks its leg, the cat gets the flu, kids need braces, the list goes on and on. What does accumulating debt for silly little emergencies do to you? It ruins your monthly cash flow like I mentioned in point number 1. Instead of spending $200 a month on a weekend getaway, you are spending it on interest on Credit Card Debt. A few months pass by and something else happens and you add a little bit more onto the pile. All of a sudden a few years later you are now in a good amount of debt and drastic measures need to be taken like refinancing your home or pulling from investments. Speaking of Investments….
Canadian’s used to be savers, not spenders: CBC article
Abuse of Assets
You work your butt off to pay down your mortgage, only to draw from your home equity to pay for consumer debt you have accumulated. You create a solid retirement plan that has a percentage of your income going away and growing over time, only to dip into it to pay for a new roof for the house. Negative cash flow leads to debt accumulation. Debt Accumulation leads to the abuse of assets not meant to be used to pay down debt. Not having the emergency fund can lead to your dipping into assets which changes the scope and duration of your goals and dreams. Seems a little farfetched that the $7 latte will kill your home equity doesn’t it? Multiple that latte by 2000, and ten years later you have created a situation where drastic measures have to be taken to regain positive monthly cash flow.
Prolonging Goals and Dreams
I met people every day who are in the years leading up to retirement. Many have money saved up and are looking for help to create a solid retirement plan. Many others have little to nothing saved up and are looking to what they can do to salvage what’s left of their working years. For the ones with no money saved up there are two main reasons why they come to this spot:
- They didn’t save anything during their working years
- They were unprepared for unexpected circumstances and it altered their plans
Often times it is a combination of the two. You wouldn’t believe how many people have had an event in their 30’s drastically shape their financial future. While unexpected events are damaging, they should not alter the overall plan of realizing your dreams of retirement. That is one of the roles of the emergency fund. Contributions to savings and retirement plans continue no matter what happens. When disaster strikes, the plan doesn’t stop. You will have to scale back spending and adjust, but you won’t have to delay retirement till 70 or never at all.
Quality of Life suffers
When you are unprotected against injury/illness or any other emergency, your quality of life will suffer. Are you used to going out for dinner once a week? If you are living on a reduced income that will stop. Are you used to a vacation once a year? If you are paying off the new transmission for the whole year that will stop too. What happens now is more depression and you will accumulate more debt trying to recapture those good feelings. The vicious cycle of debt had begun and now we can go back to point number 2 to explain what happens then. You don’t want to be eating Kraft dinner for a year because your dog needs surgery. You definitely don’t want to miss out on camping next summer because you can’t afford to miss a day of work due to your son breaking the neighbor’s front window with a golf ball. Not having emergency funds means you will suffer during the tougher times in life as opposed to life carrying on as normal. Bad moods lead to bad decisions, so having savings can save you money in the end.
These are just 5 of the things that can happen if you don’t have emergency savings built up. The cycle of protection goes as follows:
Investments protect the dreams
Savings protect the investments
Insurance protects everything
They all protect your sanity
Little things add up on both sides. Little amounts saved can up to a huge amount over time. Little amounts of debt can add up to a huge amount as well. Being proactive in your journey is key to not suffering when disaster strikes. You don’t want to be complaining about a broken water heater in your 70’s while you get ready for work at Wal-Mart.
Thanks for reading today’s post and don’t forget to tune in tomorrow when I recap Emergency Fund Week at Budget Boss. If you want to start your own emergency fund and don’t know where to get started, message me at joe@budgetboss.ca and I would be happy to help. Have a great day!
“Losing your job is terrifying, but being prepared makes it so much easier.” – Alexa Von Tobel
https://budgetboss.ca/7-things-you-should-have-emergency-savings-for/
Email – joe@budgetboss.ca
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