In part one on Monday, I wrote about how credit cards can provide short-term liquidity where emergency funds would typically be recommended. In this article, I will write about how most "emergencies" people list as reasons for an emergency fund are not true emergencies and can be easily planned for (and anything that is above and beyond can be usually covered by insurance). In part three, I discuss issues such as job loss and how you can prioritize the assets that you do utilize.
Plan Your Expenses
Assuredly, not every expense can be planned or expected.
There will always be unexpected expenses that pop up; for example: your child breaks his arm or your car breaks down. Many of the "emergency fund expenses" that I have seen promoted on the internet include "surprise wedding invitation" or "new car tires" or even "pay gardener to seed my lawn".
These are not emergencies.
These are expenses or maintenance that should be properly accounted for in your budgeting. If you need your lawn seeded, save up the money in advance. Plan to have your tires pumped, rotated and replaced as necessary as part of your budget. Save up for the wedding if you want to go.
Or, better yet... if you can't afford it, fake an illness and send a card.
Emergencies are not the same thing as "non-recurring expenses". Here's a non-inclusive list of emergencies, in my mind:
- Liability claim or lawsuit
- Medical expense
- Car Accident
- Natural Disaster
- Job Loss
Please suggest more if you have a reasonable argument - and note that I will discuss job loss further as it is the only one which isn't adequately covered by reasonable insurance options.
Ensure that You are Insured before You Fill an Emergency Fund!
For large (and I mean truly large) expenses, there is often very little you can do to plan properly. Medical insurance, car insurance, umbrella insurance and home insurance should cover the true long tails of expenses that you may incur as part of day-to-day life.
A note: cars are usually only covered up to the Black Book Value of the vehicle in an accident (and under some policies a small amount of liability insurance). If you are underwater on your vehicle, you are already under-capitalized on the vehicle. An emergency fund does not change that fact.
Simply put, any large expense that can come from one of these events (except job loss, which I will cover later) should be covered by general liability insurance.
Let's talk exceptions. There are examples of deaths in a family or massive medical bills running close to half a million dollars and no longer covered by insurance. I understand the difficulty these situations present and recognize that they are much more common than many of us would hope. I would only urge you to remember that even a "6-month emergency fund" is also insufficient to cover some of these major expenses (unless you normally spend, say, $1,000,000 a year). It may help cushion the blow of some of these, but they still will require an eventual downsizing, bankruptcy or a need for additional large income streams. An emergency fund doesn't give you any of those.
All it does is hurt your returns in the meantime.
(Especially if you have high interest debt.)