Emergency funds are like flu shots. Everyone knows you’re supposed to get one, but a lot of people don’t bother. By some estimates, only 37% of Americans have enough cash on hand to cover the smallest of financial disasters. Of course, for millions of lower-income people who are truly living on the financial edge, setting aside even a few hundred dollars can be nearly impossible. But for some, trouble saving has more to do with poor planning than a lack of money.
I get it. I was once one of those people who didn’t have an emergency fund. In my early and mid-20s, I wasn’t exactly what you would call a financial whiz. I was living in an expensive city, attending graduate school, and making ends meet through a mix of part-time jobs and freelance work. My limited income combined with my desire to have fun and buy cute clothes meant putting aside money for a rainy day wasn’t exactly a priority. To me, “saving” meant drinking at the bar that also served free pizza. So when my apartment was robbed and my laptop was stolen, I skipped right down to the Apple Store and handed over my credit card. (Renters insurance, you ask? Of course I didn’t have renters insurance.) Paying off that purchase took months. In hindsight, it was not the smartest financial move I’ve ever made.
I eventually learned from that and other financial mistakes. A few years later I was more settled, living in a slightly more affordable city, and had built up a decent amount of savings earmarked specifically for emergencies. Yet I hadn’t had to actually tap that money, since my life had been blissfully disaster-free. That all changed when my boyfriend and I were in a car accident.
We were headed out for a hike on a sunny Friday afternoon when we rear-ended another car on a highway on-ramp. Thankfully, no one was seriously injured. The same couldn’t be said for our car. Looking at the crumpled front end of our old Chevy Malibu, it was obviously a total loss, and one we were going to have to eat. The car was over 10 years old, so we didn’t have collision coverage. Plus, the accident was our fault, so there would be no payout from the other driver’s insurance.
There was also the matter of my wrist, which, after the initial shock of the accident wore off, I realized was painful and swollen. An ambulance arrived and the friendly and efficient paramedics whisked me off to the hospital, where I was informed I had a fracture. The dollar signs were ringing up.
By the time we finally returned home around midnight, I was tired, cranky, and doped up on prescription painkillers. But one thing I wasn’t too worried about was how this whole mess was going to affect my finances. I was fortunate enough to have health insurance, which I knew would cover most of my medical expenses. As far as the new car we were going to have to buy, I was pretty confident that with the emergency fund, we could cover that too.
I was right. As a one-car household, my boyfriend and I decided to split the cost of a new vehicle. Between the two of us, we pulled together the cash to cover most of the cost, though to avoid completely cleaning out our savings, we also took out a small loan through a local credit union at a very low interest rate. (Even when I was borrowing money to buy an expensive laptop I could have lived without, I was scrupulous about making payments on time, so my credit score was excellent, as was my boyfriend’s.)
All in all, the whole experience was stressful, but ultimately not catastrophic. But if we didn’t both have money set aside for the unexpected, the accident could have easily kicked off a domino effect of unpleasant events. For one, we would have had to take out a much larger loan to get a car. That would mean big monthly payments and interest eating up a significant chunk of our income. My savings also made it easy to cover expenses like my emergency room deductible and co-pays for various doctor visits and prescriptions, which added up to several hundred dollars. We also had cash on hand to cover the cost of a rental car so we could get around until we bought a vehicle of our own. But if not, both the co-pays and the rental car expenses probably would have gone onto a credit card, sinking us further into debt.
Then there was the matter of work. Fortunately, I was able to take a week off with pay, but if that hadn’t been an option I could have relied on my savings to see me through a period without a paycheck. My savings would have also been vital if the accident and injury had led to me losing my job. (I could work with a broken wrist, but not everyone is so lucky.) Those things didn’t happen, but it was comforting to know that I had something to fall back on if they did.
Ultimately, the biggest financial downside of the car accident was having to replenish my savings. But since I was now more convinced than ever of the value of having that cash, I was motivated to do it relatively quickly. So, when my fiancé was fretting recently about a large, unexpected expense we were facing, I just told him to relax. I knew we had it covered.