I was having an interesting discussion at work the other day, followed by reading a similar topic on a fellow pf blog, and felt like discussing it here to see what you guys think.
One of my coworkers just bought a brand new car. She had previously owned the same car for almost 10 years and was ready for a change. She prepared by saving up for the down payment and really did a lot of research into the car that she was interested in. Plus, because my company works with most of the dealerships here in Austin, she was able to get a really good deal on the price and interest rate.
She’s also got this new boyfriend, who thinks he’s a total financial whiz when in reality he’s a chef, and he’s been on her to use her CD to pay off the car and then just use the monthly car payments to rebuild her CD. She had been mulling it over and came to me to see what I thought. When she told me, my first question was, “Is it your emergency fund?”
She said it was and I advised against following the boyfriend’s advice. If the CD was an emergency fund and all the money she had in savings, then what would she do if something happened? Right now our jobs are pretty secure, but what happens tomorrow if they’re not? What would she do if she wrecked that vehicle? Since cars are depreciating assets, they drop in value the minute you take them off the lot. Her insurance and GAP would take care of the loan amount, but what would she buy another vehicle with? She’d be out that money with nothing to show for it.
Of course, these are big “what-ifs” mind you, but that’s what an emergency fund is for – the “what-ifs.” Paying off her car isn’t an emergency since she has budgeted – and come well below that amount, I might add – for the payment. It’s a new car with a great package for warranties and services. She really is better off just making her monthly payments for the four years and leaving her CD alone. She agreed and left it where it was.
Later that same day, I read a post by Debt to Dreams where he talked about using his emergency fund to invest in a joint business venture that had no guarantee of return. I’m all for taking risks and going for your dreams, but he has a family and a day job in this scenario, and frankly, I’m not sure it was the wisest course of action. It may turn out to be the best thing he’s ever done. I hope it is. But, the reality is that he has left him and his family wide open for disaster to step in.
Which brings me to my point of when to use an emergency fund. This fund is supposed to take care of the little things that creep up from time to time as well as the major disasters that people hope don’t happen, but sometimes do.
This includes things like the refrigerator or air conditioner going out, replacing a water heater, or hiring a plumber. Things that are unexpected and need to be taken care of right away.
This does NOT include buying that new stainless steel refrigerator you’ve been eyeing just because it looks nice. Or that expensive washer and dyer set that matches the paint in your laundry room. These types of expenses are what you specifically save for.
This can include a midnight visit to the ER, rushing a sick child to the hospital or pet to the veterinarian, or even an emergency surgery that may have come – such as needing to have a ruptured spleen removed, etc.
This does not include medical or dental services you can save for such as braces or certain types of oral or day surgeries. You can prepare for these types of expenses well in advance, so they are not emergencies.
The Big Stuff
This includes a job loss, death in the family, or any other major emergency that arises. These are the big things that we hope never happen, but we prepare for just in case.
This is not a BIG sale at Macy’s, buying new furniture, or moving. Again, these are expenses that can be planned for and do not come up out of the blue. If it can wait, it’s not an emergency situation.
There are many other things that an emergency fund is good for, and having one is even better for peace of mind. There are many things you shouldn’t use your emergency fund for, though. Paying off a depreciating asset and investing in a business venture that does not guarantee a return are probably at the top of the list for me.
What sorts of things have you used your emergency fund on? Would you have done the same as Debt to Dreams? What about my coworker, what are your thoughts on her situation?