Three Benefits of Emergency Savings

In Paducah, Kentucky, a beautiful series of murals highlights the historic downtown district, where shops and restaurants sit just above the banks of the Ohio River. But the murals aren’t there just to attract visitors to downtown — they decorate the massive flood wall that the city built to protect itself from the river’s periodic surges.

Most of the time, the river is low, and the flood wall serves only as a piece of artwork. But every few years, rain pours, waters climb, and the wall keeps all of Paducah’s downtown treasures from flooding. It wasn’t always this way, though — the city learned just how badly it needed a protective barrier when it was trashed by a massive flood in 1937.

Just like a flood wall protects the treasures of a small Kentucky town, emergency savings funds protect the treasures in our lives. Emergency funds are an age-old idea, and the serve an irreplaceable purpose for people looking to handle their money wisely. But in addition to simply keeping us safe from financial disaster, emergency funds have some added benefits. Here are three of our favorites.

1. Emergency savings keeps us out of debt.

We know that from time to time, rivers are prone to flooding, and there’s nothing we can do to predict or prevent it. In the same way, emergencies are bound to happen in our lives; try as we might, we can’t always stop them, nor can we be sure when they’re coming.

This unfortunate fact of life leaves us with two choices — we can work hard prepare for possible emergencies ahead of time, or work hard to clean up the mess after life floods our financial cities. Unfortunately, far too many people take the latter option, choosing to forego emergency savings because they figure that they can use credit cards, loans or other debt products to get them out of a bind.

This strategy might seem to work — if you borrow enough money, you can clean up any mess. But debt makes a crummy safety net. It costs us money to pay interest on the debt, and carrying debt adds risk to our financial lives.

On the other hand, saving for emergencies removes risk from our lives. You may have an unexpected $5,000 expense come up one day… and if you have the cash saved to cover it, your total expenditure will be $5,000. But if you have to borrow money to fix the problem, you’re spending $5,000 plus years of interest payments. Emergency savings protects us from having to make expensive interest payments on borrowed money. And it keeps us free from the spiritual bondage of debt.

If you’ve worked hard to get out of debt, this benefit becomes even more clear. Paying off debt took a lot of hard work and sacrifice. Don’t you think it’s worthwhile to save some extra money to protect you from going back to what you worked so hard to escape?

2. Emergency funds help to lower monthly budget expenses.

It may seem like saving up an emergency fund will take a big chunk out of your budget. And it will, up until you get that emergency fund finished. But after that, having a good emergency fund can actually help to lower your monthly expenses.

Why? Because having a cushion of savings allows us to buy insurance with higher deductibles. Think about it: If you have no savings, and you wreck your car, you’re going to need your insurance company to repay almost all of the car’s value so that you can get a new one. So you buy a policy that has a $500 deductible… and you pay a high premium for such good coverage. But if you had a $10,000 emergency fund, it wouldn’t be a big deal to spend $2,000 to clean up a car wreck. So you can buy an insurance policy with a $2,000 deductible, and that will be much cheaper than then policy with the $500 deductible policy.

It gets even better — you can take that same principle and apply it over all of your insurance policies. Emergency funds allow us to spend less on health, auto and homeowners insurance, because we don’t have to count on those policies to cover absolutely everything in case of emergency. (They also give us an easy way out of costly “protection plans” and other bum insurance deals that retailers try to sucker us into.) Taken together, these savings can represent several hundred dollars each month, meaning that an emergency fund actually helps to pay for itself over time.

3. Emergency funds give us financial peace.

In a riverfront city with no flood wall, every overcast sky causes residents to get nervous. The same is true in life: If you’re living paycheck to paycheck and have no protection against emergencies, every little hiccup in life represents impending financial doom. Study after study has shown that people who live with no financial margin in their lives have higher-than-normal levels of stress, and it’s no surprise. If every problem in life poses an existential threat to your financial well-being, you’re going to be in a constant state of nerve-fraying alert.

Conversely, building a buffer against emergencies helps to give us financial peace, a commodity worth far more than the money in the fund. Though no one can completely insulate herself against all disasters, working hard to prepare for potential emergencies allows us to laugh at the days to come.

Emergency savings helps to give us financial peace, so that we can enjoy today and look forward to tomorrow… no matter what clouds may gather on the horizon.

Photo by David Wilson. Used under Creative Commons License.