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I remember it like it was yesterday. It was a cold January morning, just a week after Christmas. I was sitting down enjoying a quiet Saturday morning and feeling thankful for everything around me. My wife was sipping her coffee and my kiddos were munching their breakfast as we looked out the window at the fresh snow falling gently on the winter ground.
All of us were in our pajamas as my wife casually pecked away at her computer. We started horsing around with the kids, being silly, laughing and just generally soaking in the joy of our life when the unthinkable happened.
Computer + Silliness + Coffee = The Equation From Hell.
Money and Relationship Stress
Managing your money is stressful.
Millions of people lose sleep tossing and turning as they battle the fear and anxiety over how they’ll make it financially. But add in another human being to the equation, a person with equal say in how the money is spent, saved, and organized, and you’ve got a recipe for disaster equivalent to a relational nuke.
In fact, money can become such a point of conflict in a marriage, it’s regularly ranked as one of the top causes of divorce.
Why? Perhaps the biggest reason is that money touches almost everything a couple does. From buying groceries to planning your future together, money impacts much of it.
Are you stressed about work? Maybe you need some retail therapy.
Do you and your significant other need some quality time together? There can be pressure to enjoy expensive dates or extravagant vacations.
What about the kids? Do you both agree what you should teach them about money? What about which activities they should be involved in and how often they should participate?
How much should you be putting away for your retirement? Does your spouse agree? Every dollar saved today is a dollar you can’t spend now. Is one of you a saver and the other a spender?
The road of marriage and family is a veritable minefield when it comes to handling money.
If by some small miracle you are able to navigate the anticipated financial hurdles, there are the unexpected ones.
Emergencies are not fun. Like a sudden storm that whips up out of nowhere and destroys everything in its path, financial emergencies have the potential to destroy a couple’s finances, and sometime relationship, quicker than almost anything.
Whether unexpected health expenses, a car that breaks down, or a roof in need of fixing, not only can these situations bring your money to its knees, they can also cripple your marriage.
But there is a solution. A seemingly magical account, able to neutralize all the perils of the unexpected emergency.
Its name? The Emergency Fund.
Now hold on.
Yes, I’m talking to you.
Don’t click away to something else, stay with me.
This isn’t like every other article you’ve read on Emergency Funds.
Yes, yes, yes, you should have anywhere from 3-6 months worth of EXPENSES (not total income) in your emergency fund.
No, you should not touch it for things that are NOT emergencies, like a pair of tickets to the big playoff game that your team unexpectedly made it to or a new patio set to replace the one that is “faded and dumpy-looking”.
Yes you should have it located in an account that’s a bit more “difficult” to access. We keep ours at a separate bank in a high interest savings account. It’s still super easy for me to transfer the money to our regular bank when we need it. It just takes a few clicks and a couple of days for the transaction to be completed (built-in impulse spending protection). This was conscious on our part as we didn’t want it to be too accessible in order to avoid the temptation to dip into it for things that weren’t true emergencies.
These are old personal finance stand-bys that haven’t changed for years. And while the specifics are up for debate (some experts recommend saving more than 6 months, others say you should have much less) the foundational wisdom of having an emergency fund of some sort is relatively universal (although some recommend using lines of credit, which I think is a TERRIBLE idea for someone who can’t even save enough to cover a basic emergency).
The Debt Spiral
A person without access to these emergency funds to cover unexpected expenses can find themselves in a vicious debt-cycle.
It looks like this.
An individual borrows to cover unexpected expenses then only pays off the minimum to stay afloat because their monthly income is already used up on monthly expenses. Unable to decrease their loan balance and with interest rates at 15% or worse, the balance continues to grow month after month, as does the feeling of hopelessness they experience when all of a sudden…they encounter another emergency!
An emergency fund not only prevents this deadly debt-spiral, it reduces the amount of stress, tension and anxiety couples feel about their financial situation.
I’d go so far as to say it is a relationship life-saver.
A Big Umbrella is a Nice Thing to Have When It’s Raining
Since getting our financial house in order about 8 years ago, my wife and I have worked hard to maintain a solid emergency fund.
As Dave Ramsey disciples, we aimed to get our 3-6 month Emergency fund set up as part of baby step 3.
It hasn’t been easy.
There have been many times when it would’ve been awesome to take a killer holiday to recharge our batteries or skim a little of the top of the emergency fund for an expensive night on the town. After all, what’s a few thousand (or hundred) bucks when we’re talking about tens of thousands, or more?
As much as these luxuries may have been great in the short-term, we avoided the temptation and kept the account topped up.
And I’m glad we did.
Because when it starts to rain, it pours. And I’m glad I had an umbrella big enough to keep us dry.
A Big Umbrella Can Be a Pain
The thing about having a giant umbrella is, it’s a real pain to carry around when it’s not raining.
People may look at you and think your strange for holding onto it when the skies are blue and the sun is shining. It can make it difficult to do some of the fun things in life. Have you ever tried to ride a bike, play soccer, or go to a fancy restaurant with a giant umbrella? Never letting your giant umbrella out of your hand is a real inconvenience at times.
But the giant umbrella is a form of insurance.
Yes, when it’s not raining, it would probably make sense to not have it with you. It would make your life much more enjoyable and easier to not have to lug it around everywhere. And yes, you would seem more “free” without it.
But when it starts to rain, it sure is nice to have it with you.
And make no mistake about it, it will rain.
It’s just a matter of when.
My Emergency Fund Experience
I speak from personal experience.
On that cold wintry day in January, we spilled piping hot coffee all over our MacBook Air. After the initial shock wore off, we hopelessly tried to dry it off, but not surprisingly, to no avail.
Our next step was a trip to the Mac store where it quickly became apparent that we were pooched. Our hard drive could be salvaged, but it didn’t make financial sense to try to fix it.
We needed a new computer.
Now if you’ve read my blog you know I’m Scottish. Scots are known for a lot of things: kilts, bagpipes, golf, and some of the finest whiskey in the world.
They’re also known for being cheap.
I reject this.
I’m not cheap. I’m not frugal either.
I am a valuist.
Be that as it may, I wasn’t thrilled to have to spend money on a new computer when just hours earlier we had had a perfectly good one literally at our fingertips.
I’m sorry to say that my poor attitude contributed to some “relational tension” in our home.
(Read: I was a bit of a baby when it came to spending money to replace our computer)
Now that relational tension would’ve been WAY higher if we would’ve somehow needed to “find” the money to get a new computer. It probably would’ve involved a credit card, debt, angry words exchanged between my wife and I about whose fault the accident was, followed by tension in our marriage and home and a few days in the doghouse.
Not only that, but we would’ve had one foot down the rabbit hole of the debt-spiral. And with that nasty cycle would’ve come more marital stress, tension, and anxiety.
Fortunately for us though, we had our emergency fund to cover the cost of the new computer. After an hour in the Mac store we had a laptop and we were back in business.
As I said, it’s not a matter of IF you’ll need your emergency fund, it’s just a matter of when.
The list of things we’ve used it for in our 7 or so years of marriage is long:
iPhone (my wife literally dropped her iPhone in a cup of hot tea. I don’t think we could recreate the incident again if we tried. Needless to say, we now keep electronic devices FAR away from hot beverages)
Flights to attend a relative’s funeral
Hot water tank
Unexpected car repairs
That’s about one emergency/year. Adding up the approximate costs of all of them, we use a bit more than $1000/year from our emergency fund.
If we didn’t have our emergency fund, that’s a lot of debt we would’ve needed to take on.
A Debtly Disaster
How much debt, you might be asking?
Well let’s assume Jane has 1 emergency every year which costs her $1000.
For our case study, let’s assume it happens every year, like clock-work, on January 1st (crappy way to ring in the new year) and that the interest rate on the credit card she uses to cover the emergency is 15%, the average rate in 2017.
If she only paid minimum payments (we’ll assume 2%) but not the balance (the debt-spiral), after one year she’d owe $908.93.
But after year 2, she’d owe $1750.94.
The chart below shows how much interest she’ll pay, her total payments made, and what she’d owe after 10 years of being in the debt-spiral.
|Year||Cost of Emergencies||Interest Paid||Payment||Final Amount Owing|
This is depressing.
Even as I was calculating the numbers, I was feeling bummed out, and I’m not even in this situation.
In 10 years Jane will have paid $9743 of MINIMUM payments and STILL have $6334 she owes to the credit card company. This gives a total cost to cover her emergencies of $16,377 (don’t add in the interest paid column since that’s factored into the payment amount).
Meanwhile, In an Alternate Universe…
If instead Jane had built saving for an emergency fund into her budget, she’d need to save $1000 each year to cover our emergencies. That’s about $83 a month.
Or if you already have a solid emergency fund, you’d need the $83 every month to replenish it.
Over 10 years this works out to $9960, which isn’t exactly peanuts for most of us. But it’s almost $6500 less than if you relied on credit cards to cover your emergencies. And you don’t have to still find a way to somehow pay off your debt at the end of it all!!
For $83 a month you could not only avoid the financial disaster of having to enter the debt-spiral, but you could also reduce the stress and tension in your relationship with your significant other (I feel like that last sentence was straight out of cheesy commercial for life-insurance or some kind of reverse home mortgage).
Now I get that $83 is a significant amount of money to save each month for some people. Many are stretched thin right now and FEEL as though they have no wiggle room to save any money.
That’s why you should take half a day out of your busy schedule to call around and renegotiate some of your most common bills, and use my Money Cheat Sheet to find invisible money hiding right under your nose. If you do, you can easily save a few HUNDRED dollars each month, more than enough to get your emergency fund in order.
(SPOILER: I just saved $60/month on my cable and internet with just one phone call!!)
Bringing It All Together
If I came and knocked on your door selling a product guaranteed to improve your marriage, reduce your stress level, help you sleep better at night and set you up for long term financial success for only $83 a month, what would you say?
Wait, don’t answer that.
You’d probably tell me I’m crazy and slam the door in my face.
But what if I wasn’t selling anything?
What if there was nothing in it for me except seeing the joy on your well-rested face as you used your Emergency fund to confidently navigated the unexpected hurdles of life? What would you say then?
Money well spent.
Has your emergency fund saved you major headaches? Please share in the comments below or on Twitter @method_money or my Facebook page Method To Your Money. You can also find me on Pinterest. Want more great ideas about mastering your money? Sign up to receive my weekly emails detailing how to keep more of your hard earned cash!