Monday, March 17, 2008

This terrible tragedy reminds me of how important it is to have an emergency fund. Often, I find that there are two schools of thought regarding emergency funds: either a new television, sale at Bloomingdales, or last minute cruise deals are emergencies, or nothing short of complete and total loss of income and housing is an emergency.

Imagine having your apartment and all its contents obliterated by something you couldn't possibly have foreseen. Imagine suddenly winding up in Red Cross housing with nothing but the clothes on your back. In the current situation in New York, those people will likely be compensated (eventually) by the crane company or class action lawsuit. Anyone would accept that the incident caused harm and suffering to the people affected.

But imagine that your apartment is completely intact, but you are not allowed into it until the area is cleaned up--which might take weeks. You still have to pay rent, but now you must also find another place to live indefinitely. You could stay in Red Cross housing, or with a friend, or in a hotel--regardless, you're going to incur expenses of some kind. You'll need to buy clothes to go to work. You'll probably be eating more meals out, and maybe doing some retail therapy. It might be harder for such displaced (but ultimately "uninjured") parties to recoup the expenses such an incident caused them. Imagine the additional stress you'd feel if you had to put all these purchases on a credit card. Imagine the comfort of not having to pay super-close attention to the checkbook during this time, because you had a savings account full of money for just this purpose.

Financial experts recommend an emergency fund of X-times your monthly expenses (Dave Ramsey says 3-6 months, Suze Orman says 8, some even advocate a year). Sometimes this can cause the confusion that "Oh, an emergency fund is just there to get me through times when I have no other money coming in," something rather unlikely to happen, even with the current economy (when laid off, most people qualify for at least some type of unemployment benefits, and I'd hope would go out and find whatever work they could to be bringing in money as well). But an emergency fund is not just peace of mind in case you lose your job. Unexpected things happen all the time, and it's not realistic to be unprepared that they will happen to you, too. You don't have to experience a complete and total devastation to be affected and need to fall back on an emergency fund--car accident, sickness requiring more paid sick days than you're given, flying across the country because of a death in the family, barred access to your own home--these things are what the emergency fund is for.

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