The following is a guest post from Crystal at Budgeting in the Fun Stuff, where she writes about finding the balance between paying your bills, saving for your future, and budgeting for the fun stuff along the way.
As a middle class young adult, I view emergency savings as very necessary. Many investments may make a better return than a boring old bank account, but only cash on hand can cover immediate problems with the least stress as possible.
Our First Reminder to Build up an Emergency Fund
My husband and I bought our home about 4 years ago. We were young, 23 and 24, and didn’t properly plan to have much cash left after shelling out $23,000 as our 20% down payment. In fact, we only had about $8000 left in cash and maybe $10,000 in my 401(k).
The first night in our new digs, we discovered that although the air conditioner fan would work, we weren’t getting any cool air out of the thing. We called my husband’s grandpa the next morning and asked if he could take a look since he had years of a/c experience under his belt.
Within 10 minutes of arriving, he discovered that the previous owners must have stolen the connection that allows power into the unit itself. Luckily he had a connection on hand and we had our a/c back for the price of a pizza and some soda.
What if my husband didn’t have a grandpa that knew all about air conditioners? What if the whole unit was broken and it wasn’t just a missing piece? That could have cost us $4000-$6000 and we would have been completely broke within 2 days of moving in.
Our Second Reminder for a Better Emergency Fund
A few months later, our electric water heater went nuts. After some time looking for the issue online, I decided to personally try to replace the two thermostats and heating coils. The problem was that the heating coils were stuck in place. We ended up paying a plumber $150 to use a crescent wrench the size of my arm to replace the 4 parts we bought at Home Depot for $25. Once again we got lucky and this quick fix worked.
What if the water heater needed to be replaced? That would easily cost $1500-$3000 with labor and I certainly couldn’t do it myself. I took this as a sign and started funneling more cash into a side fund just for big, silly problems.
My View of an Emergency Fund
I think that having cash on hand is beneficial for at least the pop up emergencies like car problems or home issues. I don’t believe having 6-12 months of expenses in cash is necessary, but having $10,000- $15,000 lying around for cruddy days/weeks is just a good idea. If my husband or I lose our job, we can live on the other’s salary but there would be an adjustment period that would need to be covered.
Stock investments, mutual funds, Roth IRA’s, 401(k) and investment ISA contributions are all ways to get money you need if something truly awful happens, but why cash out your investments for one-time money needs?
The interest we give up by keeping some cash in a 1.2% interest savings account is worth it to us in the long run if we never have to touch our retirement funds or other long-term investments for something as unexpected as a new refrigerator.
What do you think? Is emergency savings necessary to you?
[Kevin] I agree with Crystal and I believe that some buffer is necessary; it’s not very fun to find yourself with unexpected expenses and no cash to pay for them! I also believe that keeping a healthy gap between income and expenses is very important, and in fact is necessary to build up a buffer in the first place.
For a semi-controversial view of the opportunity cost of large emergency funds, read my post “Is It Worth It to Have an Emergency Fund, or Should I Pay off My Mortgage Instead?“.