A few months ago, my wife and I had something happen to us that happens to most people from time to time. We had an unexpected expenditure come up, something that we hadn’t planned for ahead of time. We had a car repair to make, plain and simple. All of a sudden, the AC compressor clutch on my wife’s car decided that it had served it’s time, and wanted to retire. Just fine by me, I like the sound of retiring…except when it costs me money. So, naturally, I quickly began to research on how to fix it, but before I had been digging into it for a mere 45 minutes, I quickly realized that conducting this repair was beyond my ability. Not only was it going to require tools I didn’t have, it was going to take time that I didn’t really have either. Unfortunately, taking it to the shop didn’t generate any outcomes that were any more positive. The total bill, just over $600 bucks to fix.
Now, my wife and I have savings. As I write this, I’m not sure of the exact amount, but at the time, I knew that I had enough to pay for this car repair. What we didn’t have, was an emergency savings account. Now I know what you may be thinking. If you have money in savings, if you don’t have to put the bill on a credit card, if you don’t have to borrow money from family, what does it matter what you call your account? Why does it’s purpose matter? Well see, we sort of had that money planned for something else. When my wife and I put that money into that savings account, we weren’t planning for an emergency payment on a car. We had that money planned for a house.
Here, we come to the biggest benefit of having an emergency savings account: not only do you have the money for the emergency, you have the correct “label” on the money for the emergency. Many people think that if they have money in a savings account, then they are just fine and will be prepared for an emergency bill. While this might be true to a point, this kind of thinking doesn’t really fit in with the saving mentality. If you set aside money in an account, it needs to have a purpose behind it if you want to make any progress toward financial freedom. Putting funds into an account for a new car, and then using half of the money to pay for a car bill on your old car may seem ironic in the front, but around back its a way to completely throw off your savings plans.
So long story short, my wife and I are now $600 short on our mortgage savings goal, but have since recouped that money through our savings plan. But have we really? Wouldn’t we have $600 more in the account, if we had planned with an emergency savings account in the first place?