The Theory and Reality of Emergency Funds

Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.

I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.

My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.

In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.

The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.

The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.

Image credit: U.S. Army

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