A Lesson in Emergency Funds

One of the most common pieces of advice for those trying to get out of debt is to build an emergency fund.  This makes perfect sense: without an emergency fund, you will end up going further into debt to finance any unexpected, but necessary expenses.

Soon after I decided to put the breaks on the years and years of accumulating debt, I took this advice to heart and setup an ING Direct sub-account called "Emergency Fund".  I setup automatic transfers of $100 every two weeks, on payday, so that after a few months I would reach the $1,000 that the experts agree is the minimum size for an emergency fund.

It felt very strange to actually have a few dollars saved in the bank.  Whenever I had a few extra dollars in the past, from a bonus at work or even a birthday cheque, it went directly towards one of the many credit card balances I was carrying.  Unfortunately, because those balances were so high, nothing really made much of a dent in them, and within a few weeks I would spend enough to eliminate any gains.  But now, there were actually dollars building up that were not being spent soon after.  Fantastic!

A few weeks later, as I was pulling out of a parking lot onto a busy street, CRASH.  I collided with a car that was travelling down the centre lane, that I didn't see coming.  The damage?  About $3,000 between both our cars, and I was on the hook for all of it, lest she file an insurance claim and my rates go up even further.

Talk about a lesson in emergency funds!  If only I had been building my emergency fund months or years earlier, I would have simply withdrawn the $3,000 in cash, perhaps negotiating a discount for paying in cash, and moved on.  Unfortunately, at that point I had only saved about $400 in my fund.  Rats.

I decided to leave the $400 in the emergency fund, and as painful as it was, I put the repairs on a credit card.  After all I had learned and committed to do in terms of a debt reduction plan, this felt like going back to old habits.  But I tried to see it as a necessary evil, only necessary because I had not yet made enough progress to do things properly.  I vowed to continue to build my emergency fund, to avoid this type of situation in the future.

My emergency fund is now close to $1,000, and I plan to continue to build it at the same $100 every-other-week pace for quite some time.  Hopefully, but the time the next emergency hits, it will serve its purpose.