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Absorbing Unexpected Expenses

I always like to think that I’m on top of things financially. I track what goes in and what goes out, and invest quite a large percentage of my income away. In terms of emergency expenses, there are a number of scenarios that I oftentimes run through my head when checking the balance on my account. Would I have enough saved if my car needed new tires? What about a root canal? Surgery? If I lost my job, how many months could I go without another one? I think this is a healthy exercise (assuming you’re not obsessing over these things day in and day out, of course!).

This past week my grandfather recently passed away, and I needed a suit to wear for his funeral. Unfortunately for me, I didn’t have a suit (if you can believe that, I’ve always disliked formal wear), and needed one by the end of this week. At first I was much do suits cost, anyway?

But the existence of my emergency fund came through with flying colors, and easily absorbed the cost of my new suit (which thankfully will get plenty of use at business meetings/interviews/other formal events like weddings in the future). Here are some tips to make sure you aren’t caught off-guard when emergency strikes:

  • Save monthly, but add a little extra: It’s common advice to put just a little bit away each month for emergency spending, but I like to take it one step further. Whenever you get a windfall or bonus from your place of employment, take a portion of it and throw it into emergency savings. This way you’ll be buffered from getting hit with a number of expenses and having your emergency fund get depleted faster than you can build it back up.
  • Interest is good! Check out and compare rates on different savings and money market accounts. Just because you’re being conservative doesn’t mean you don’t need to worry about preserving the value of your money.
  • Emergencies ONLY: When our emergency fund starts to grow into a significant amount, we tend to start having temptations to tap it for the wrong reasons. Don’t rationalize a purchase that doesn’t qualify as an emergency (Well I have five thousand in there, I can take it out to buy X, it will barely make a dent). This will send you down a road you really don’t want to go!

Emergency funds are the least flashy and most boring of all savings. Not only do they not harness the power of compounding because they need to be liquid and available at any time, but you only take money out when something bad happens. Of course, when the proverbial er…stuff hits the fan, you’ll be ever so thankful that the emergency fund was there to save you.

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