Mama PoP On Emergency Funds

After getting dragged into the world of pf blogging by Mr & Mrs PoP, Mama PoP clarifies some of her changing views on “emergency funds”.  Take it away, Mama PoP!

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According to many experts, an emergency fund is what you would use if your water heater died suddenly or your car needed expensive repairs that weren’t covered in your budget. I’ve never really thought that those expenses were worthy of the term “emergency”, although they are darned inconvenient.  (Mrs PoP – We don’t like the term emergency fund either, so we call it a cash buffer.) But, why would you need to save three to six months of post-tax income for those kinds of problems?

I was naively viewing the emergency fund as the money someone would live on temporarily if they got fired or suddenly decided to quit their job. I always thought that this was unnecessary for me because I never really knew anyone who actually used an emergency fund that way. I thought that since I was good at my job, I wouldn’t need an emergency fund, either. I’ve recently learned the error of my thinking when Mr. PoP’s little brother was injured at work.

Ouch!

The injury was one of those fluke accidents that, while it was bloody and painful, at first it didn’t seem to be too bad. (Mrs PoP – Readers, we have spared you the bloody pictures that Little Bro thought were necessary to send to family and friends immediately after the accident.  So.  Gross.)  After the emergency run to the hospital and stitches to sew up the deep cut in his finger, he was back at work the next day.

But That Wasn’t The End of It

Unfortunately, the full use of his finger was impaired and he had a lot of pain because of severed tendons and nerves. Surgery was required plus 6 weeks in a cast and no work at all during that time. Add in the required physical therapy and you have a significant outlay of money and time.

Direct medical costs such as diagnostic tests, exams, surgery, and physical therapy were covered in full by Workmen’s Compensation, but the need for cash showed up immediately in lots of out-of-pocket expenses. For example, each time he had to be seen by a doctor, surgeon, or physical therapist, it required him to take a whole day off from work. This was because he works on an island and the doctors who would take payment from Workman’s Compensation were all on the mainland several hours away.  Each time that he needed to see a doctor, he lost a day’s pay. Cash flow became a serious problem.

Travel to and from medical treatment was very expensive. Some of his travel costs were reimbursed, but he had to pay up-front and then submit the receipts for payment. For example, a single doctor’s visit cost $390 in transportation fees alone (taxis and ferries). There were five doctor’s visits in addition to the emergency room and another trip for x-rays. On the day of his surgery, he was required to have a responsible adult with him who would be there during the surgery and provide transportation to his home. The surgeon would not release him to a cab driver, so I had to be there. I live three states away and took time off from my full-time job to do this.

Once he had the surgery and couldn’t work for six weeks due to the recovery time and the hand and arm casts he had to wear, Workman’s Compensation reimbursed him 60% of his average gross pay. But there was no reimbursement at all for the first five days that he was unable to work. Since he already had trouble making ends meet at 100% of his pay, this was a real problem. We decided that he would have to move back home with us during his recovery because he couldn’t afford to live independently on this drastically reduced income.

What Did He Do?

Without an emergency fund, Little Bro turned to the bank of Mom & Dad for loans. This worked out for him, but in many cases there is no family member who can shell out that kind of money and wait around to see if it will be reimbursed. There were so many delays in getting the appropriate care because everything had to be approved in advance by Workman’s Compensation. We even had to have a lawyer help out by calling the Workman’s Compensation office and asking them to take care of business!

I don’t think this experience is all that uncommon, hence the recommendation for an emergency fund. However, it seems to me that the very people who are the most likely to need an emergency fund might be the ones who have the hardest time saving money because they are barely making ends meet.  In fact, those with the most uncertain jobs are told to have the most money saved.

 

At what age did you develop an emergency fund and start saving for the unexpected?

53 comments to Mama PoP On Emergency Funds

  • Great info Mama PoP, this is perfect for explaining to folks who are in debt-payoff mode that they need to have an emergency fund available first, because something like this could take them 5 steps backwards if they are having to borrow again!
    FI Pilgrim recently posted..Would You Become Self Employed For Less Money?My Profile

    • Mama PoP

      I think the sudden and completely unexpected nature of this injury added “insult”. As a young guy, he still believed that he was invincible!

    • CincyCat

      FI Pilgrim, I am inclined to agree. I had been on the fence about funneling money into an e-fund/buffer account while we are still in debt payoff mode, but I have been inspired by the past couple of POP posts on this topic. Starting with my first paycheck in 2014, we are going to start skimming some funds off the top into a short-term needs account, and rolling the net into our regular day-to-day bills & spending account. I get paid bi-weekly, so I think that after a few months, we should have enough of a cushion that we shouldn’t need to reach for the plastic to cover unexpected expenses.

      • Mama PoP

        Dear CincyCat,

        That sounds like a great plan! The PoPs have led the discussion on the “how much to have” and it is directly related to comfort level. Having money just “sitting around” and not earning much is tough, but it is an important part of a sound financial strategy, as I have recently learned.

    • FI Pilgrim, having a “reserve fund” is key to financial peace of mind. So, yes, building that reserve fund needs to go hand in hand with reducing debt. I have 2 reserve funds: one holds a year’s worth of baseline expenses… the other holds the maximum out-of-pocket that I would be liable for in case of a serious medical situation.

      However, I think it’s also OK to consider credit card available limits as another type of reserve. (I seem to always be able to count on a zero-percent balance transfer offer to come along to make debt payoff almost free.)

  • I’m young-ish (28), and have a reasonable “cash buffer”. It would stop the immediate turn to credit or family for the funds. Depending on how it worked, it would be good for three months, or more if I had workman’s comp, or employment insurance kicking in. That being said I want to have closer to $10,000 in there. That won’t be until I am done with debt repayment.

    My biggest concern is for my brother – he is a mechanic so has the possibility of severe workplace injury, and it’s a very tight budget right now (he’s in his last course of apprenticeship, then will be fully licensed). He could turn to our parents if something did happen, but I know that he doesn’t want to really do that. Him saving is so hard… and he’s such a hustler, which is what makes it sad. He works ten hour days, six days a week, and does car-related stuff on the evenings/weekends for friends/family. I hope he’s putting at least a few dollars away for a “just in case.”

    • Mama PoP

      I agree, it is especially hard to see someone working so hard and yet not making enough money to get ahead and be financially secure.

  • Thanks for the great post. Such a good example of why an emergency fund or cash buffer is important- although your point is well-taken that often the people who need that kind of buffer the most are least likely to have it.
    Dee @ Color Me Frugal recently posted..Yakezie Challenge UpdateMy Profile

    • Mama PoP

      It was a real eye-opener for me to see how fast the non-existent cash buffer was needed. Of course, living on an island far away from the type of medical care he needed was an extra wrinkle.

  • I don’t look at my cash as an emergency fund but short term cash. Since we run a surplus every month in our income, between that my cash, equity line and investment portfolio I don’t have a high cash balance.
    It is true the people who often need an emergency fund are the one who least can afford it.
    Charles@Gettingarichlife recently posted..How I Was Able To Buy Property 4.5….Breaking The Real Estate MythMy Profile

    • Mama PoP

      I also kept a small cash buffer and invested all the $$ that I could. But, I realized through this experience that there are circumstances (illnesses or injuries) that would completely prevent me from working, at least for a time. This experience caused me to apply for disability insurance at my university, something that I had refused when I began working there 15 years ago.

  • That’s a great lesson for why we need emergency funds. You just never know what can happen and in a split second you can go from being just fine financially to further behind. It does seem that those that need an e-fund the most, don’t or can’t save for it. I’m not really sure what can be done about that other than trying to educate about the importance of an e-fund.
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    • Mama PoP

      I agree, but discussing the need for an e-fund is a touchy subject to broach with someone who is working 90 hours a week and living paycheck to paycheck. Luckily, Mr. PoP’s little brother totally loves his work and is back to work now.

  • I would have gotten so frustrated if it cost me over $300 to see a doctor and a full day of work. Thankfully living on the mainland makes doctor visits easier, but it still always makes me miss some work. Not a fun situation
    Cash Rebel recently posted..November 2013 Goals UpdateMy Profile

    • Mama PoP

      Little Brother’s boss was not helpful either, as he didn’t want to do without him for a whole day at a time. While I used to like to “get away from it all”, I now recognize the negatives of being far from necessities like medical care.

  • I don’t really view an emergency fund as being for the kinds of things you should expect to happen, like car repairs. We have dedicated savings for that. The emergency fund is for exactly the kind of situation described here. I’m personally experiencing its tremendous value right now, as the start-up I was working for hit a rough patch and I’m now out on my own. Without those savings, I would be in a panic to find any job as quickly as possible. With those savings, I have time to find something I truly want to do while still being able to provide for my family’s needs. That kind of thing can happen to anyone and is the real reason to have an e-fund.
    Matt Becker recently posted..How to Know When You Need Life InsuranceMy Profile

    • Mama PoP

      You’re so right, Matt. I was very naive to think that I had control of my life and therefore didn’t need a cash buffer or at least disability insurance! We have always had a HELOC to draw on, but an extended time out of work would have been really tough.
      It’s great that you were financially prepared and can use your savings now during this transition time in your work world.

  • Debbie M

    I developed an emergency fund at about age 47. I had savings for repairs and for big purchases as soon as I could afford to (probably about a year after grad school). Before then, I would move back in with my parents if I had trouble. And I did have long-term disability insurance (and quickly saved up enough sick leave to not need short-term disability insurance).

    But I never had savings for unemployment because I worked for the state–in exchange for low pay, you never get laid off so long as you can stand to do 2-3 people’s jobs during hiring freezes. Except now they do lay-offs, too. And I got to where I couldn’t stand my job and _wanted_ to be unemployed.

    I really hate when someone else has to be there after a doctor visit–they wouldn’t release him to a taxi driver?? And I often take buses–I’m pretty sure that wouldn’t fly either.

    And I hate that the people with the least money also usually have pretty bad benefits (if any) and so are the people who most need that kind of fund. What’s sad is that even many people who could pretty easily save also live paycheck to paycheck. The one thing that makes me feel rich is not having to live paycheck to paycheck–having enough savings to be able to handle large expenses, or to take advantage of bargains even if I’ve officially spent my money for the month.

    • Mama PoP

      It is a special and wonderful kind of security knowing that you have enough savings to cover large expenses or take advantage of bargains. It is probably essential to try to set some ground rules about what would constitute a fair use of the savings, though. I can imagine someone dealing with the temptation to decide that it’s okay to use the cash buffer for an unessential item! I do have friends who believe in “Retail Therapy” 😉

      • Debbie M

        I did not have this problem. I had my savings split up in my mind into mini-savings for various goals–one for car repairs, one for expensive fun stuff like vacations and electronics, etc.

    • “I really hate when someone else has to be there after a doctor visit–they wouldn’t release him to a taxi driver?? ”

      We ran into this issue a few months ago, too. I had an endoscopy performed, and the doctor’s office informed be beforehand that state law required someone be there to receive the patient after a general anesthesia was used. If I hadn’t had family (Mr PoP took the afternoon off work to be with me), there are specialized medical transportation services that fall between a taxi and an ambulance that they could release you to. I think it’s mostly a liability issue – they don’t want to release you to someone who might take advantage of you in a woozy/confused state.

      • Debbie M

        Alright, that explanation makes sense. And it’s good to know there are strangers you can hire if your friends and family have to be elsewhere. I bet they’re super expensive, though!

      • trudy

        The trouble with after an endoscopy or colonoscopy is that they have typically given you Versed, which causes amnesia. It might have worn off by release time, or you might have memory gaps through the next several hours. Not the time to be driving yourself or with some random taxi driver. It’s not like just being a little wobbly and you can hang around until you aren’t.

        The last time i went in for this, I hired the responsible guy who is a jack of all trades for my various house projects to drive me to and from. My relatives and neighbors were, like, what a surprise, working or away. It makes you feel kind of humiliated to have to hire someone for this, and the doctor had no idea anyone would have this problem, but the intake lady says it happens all the time.

        • Mama PoP

          I found that when I inquired about hiring someone to take care of our son that the surgeon’s receptionist had no leads to offer. My son felt that he could not ask any of his co-workers to take a whole day off to take care of him, and I imagine that he felt a bit frustrated to find that he would not be allowed to manage on his own.

          I started researching on the web, but quickly found that I was getting nowhere fast. Once I heard more about the surgery and recovery requirements, I decided to just go for it and be there. As it turned out, once we saw how helpless he was with that huge cast (see picture) and figured out the finances, it was best that we were there to bring him home to convalesce.

          I am a strong believer that any time someone I love is having a medical procedure that includes needles, anesthesia, or scalpels, I need to be there if at all possible. It might just be a mom thing.

  • Does not sound like a fun situation. My mom has had experiences like this. And in her line of work, she doesn’t have many options.
    SavvyFinancialLatina recently posted..Leaning In At the Start of Your CareerMy Profile

    • Mama PoP

      As you note, the type of job is critical to determining not only your options but also the type of care needed. If Mr. PoP’s brother had a different kind of job he could have worked soon after the surgery. In fact, I think it’s possible that they would have recommended a different and less radical treatment plan. Unfortunately, he needs to use both hands to do his job!

  • Anne

    That sucks, I hope Little Bro is back on his feet now. When I was living in Cali my roommate had horrible experience with workers comp, and also eventually retained a lawyer to get more physical therapy than they originally approved. While her job didn’t penalize her for missing work (she had plenty of sick time built up) for appointments, doctors would constantly schedule an appointment without having the approval to do the scan the appointment was for and send her home after 2 minutes (while billing workers comp for a visit, of course).

    I started my e-fund right out of college, I saved about one month of expenses and then paid off my car, and then went back to building that cushion. Now I keep about 3 months in cash, but have more I could tap from taxable investments if it came down to it.

    • Mama PoP

      Yes, he is happily back at work and will know the full prognosis for the surgery after a year of healing. My take-home regarding workman’s compensation is that there are good people working there and you just have to be patient and persistent to get their attention. Our son is neither patient nor persistent, and the workman’s comp people would not return my calls (probably rightly so since he is not a minor). That’s why I contacted a lawyer to try to get the ball rolling.
      It’s great that you have paid attention to your e-fund. I think 3 months in cash is smart, especially if you have sick days and disability insurance.

  • Mama PoP, Great article! As soon as I started making money is when I started saving for an emergency fund. Of course, at 16 years old, my “emergencies” were not real emergencies but I had the concept early on. It wasn’t until I got pregnant that it became serious and substantial amount.
    H @ Minding My Cents recently posted..Of Brand New Homes, HOAs, and Mello-RoosMy Profile

    • Mama PoP

      Thanks, H!
      I think it is unusual for someone to have begun an emergency fund at such an early age. Can you tell me how that happened? As you might be able to tell from the post, I have not been able to convince our youngest child that saving money is necessary!

  • I put a percentage of my savings to paying off my debt, and it has left me a bit anxious primarily because of examples like the one in the post! I do have some safeguards in case something unfortunate happens, but I’m determined to rebuild that cash buffer (love Mrs. PoP’s term for it) for just in case moments. I hope little brother is 100% recovered!
    anna recently posted..2014 Goals/PlansMy Profile

    • Mama PoP

      Anna, thanks for your good wishes. We won’t know for a year how successful the surgery was, but he does have less pain and is fully back at work.
      Glad that you will be rebuilding the cash buffer!

  • I remember thinking that I would never get hurt. While I didn’t, I did come across a few emergencies. I didn’t have an e-fund back then and those expenses would go on the credit card. Now, I have a nice sized savings account and don’t worry about the unexpected anymore. I know I am covered!
    Grayson @ Debt Roundup recently posted..Got Expired Coupons? Don’t Throw Them AwayMy Profile

    • Mama PoP

      Hi Grayson,
      Glad that you didn’t get hurt while you were invincible! :-) Now that you are wiser and are covered for emergencies, I’ll bet your family feels better, too!

  • This story really illustrates the huge difficulties that someone can face when they get a string of bad luck (loss of pay to get medical care, the need for someone to be there just to get medical care, transportation, etc.). There are gaps in the safety nets and I can see how this situation could have easily gone from bad to catastrophic without the benefit of great family members willing to lend financial support AND to travel three states away to assist.

    Thanks for sharing this story!
    Done by Forty recently posted..A Case for OutsourcingMy Profile

    • Mama PoP

      Dear Done,
      An interesting wrinkle to this story is that when I got frustrated with workman’s comp not taking care of our son as fast as I thought they should, I looked into having his private health insurance kick in. No dice. Since the injury happened at work, the private pay Blue Cross/Blue Shield insurance that costs $179 per month is useless. It was a wake-up call for me.

  • Is the point we don’t need a cash buffer if mom & dad will bail you out? Just joking [….]

    I started mine at 22 when I graduated college. I figured it was, you know, the responsible thing to do. I’m not sure how big of a bind it would have gotten me out of, but I had good intentions.
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    • Mama PoP

      Nice, Elroy! :-)
      Starting a cash buffer right after college was certainly the responsible thing to do and good intentions count for a lot.

      Actually, the story would have been better and made the same point if our son had had a nice, fat, “cash buffer” to cover this accident, but that wasn’t the case. Everyone’s life story is different and this son has made career choices that will keep him pretty broke for a bit longer. I don’t honestly know when/how he will be able to accumulate enough savings and security to make me feel comfortable.

  • I’m sorry that happened. Ouch! Life is full of unexpected things. I’m a freelancer and it’s even scarier for me to think of when and if work dries up AND thing happen like medical expenses (I have insurance but it’s crappy), car problems, etc. The peace of mind of having that cash buffer is really worth it.
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    • Mama PoP

      I agree completely. I have always wanted to do something entrepreneurial like you are doing, but have put that off as something to do in retirement because the security of my job has always been there. Having a cash buffer is a must for a freelancer, and it’s great that you have that! :-)

  • Ouch, that definitely sounds painful. Reminds me of a team mate we had in our dodgeball league who jammed his finger during our final game. He found out later on that the finger was actually broken. Not something that will keep you out of work but the financial costs of treat go up a lot more to repair a broken finger vs a jammed one. That’s why it’s good to keep cash on the side to deal with situations like that.
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    • Mama PoP

      There was a point when I wished that our son had been injured off the job (like your friend) because it was so tough to get Workman’s Compensation to get started. However, in the end I realized that while his private-pay health insurance would have covered his actual treatment for an injury that had not occurred on the job, they never would have helped with the travel expenses and loss of income due to the required surgery.

  • We built up our emergency fund after we got out of debt…and I’m glad we did. We do overfund it sometimes but I am kind’ve conservative about savings. I like to sleep well at night!
    Holly@ClubThrifty recently posted..Body Language in the WorkplaceMy Profile

  • Oh that sucks! I didn’t start an emergency fund until last year. BUT for many reasons I will never have a large ER fund.

    1) Im in canada so I’ll never have to worry about these medical expenses and all prescription/dental emergencies would be covered by our private insurance.
    2) I have millions in life and malpractice insurance should I not be able to work due to workplace injury or getting sued or wheatever
    3) Both my husband and I are in very secure jobs that God forbid we lose them, we’d pick up another in the same field quickly.

    Once our debt is paid off I will sleep fine with one month worth of expenses in our ER fund which would float is until Canadian employment insurance kicked in (ie injury at work/loss of jobs) or we found another job. It should also be enough to cover any inconvenience like blown tire etc.
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    • Mama PoP

      It certainly sounds as though you have thought it through and covered your bases. I never thought about malpractice insurance working like disability insurance.

  • I see people all the time who have work related eye injuries. Most of them heal up and are OK, but sometimes they require surgery or extensive therapy. I’ve actually had people have to declare bankruptcy because of the combination of loss of work plus medical bills. If you can’t save up for an emergency fund, you likely can’t pay for disability insurance, but I think that is as important as car or homeowners insurance.

    • Mama PoP

      I just did the math, and in my case the disability insurance that I just applied for will cost me $170 per year. That is group coverage and it seems to be pretty affordable to me. Because I didn’t get it when I began working at this job, I had to do an exam so they could decide if I qualified. Not getting the insurance at the date of hire has saved me $2,380, which is good but would have been quickly used up if I had incurred a covered injury and lost my paychecks.

  • I don’t have an emergency fund because like you say, I don’t have problems saving money so my money is invested but could be cashed out, maybe at a loss, in case of emergency. In the meanwhile, it earns a better return than cash.
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    • Mama PoP

      I see an advantage in being fully invested in that it would be less tempting to use the buffer for something that is not really an emergency. I hate to cash out any money that I have invested so I would be more likely to try to tough it out.

  • Ouch, and ouch. A perfect example of why it’s so important to have an emergency fund. I had a bit of a medical emergency when I was in grad school. At the time I had school health insurance and they were claiming they wouldn’t cover my emergency surgery because I went to an MD (from the ER I was admitted) who wasn’t “in-network”. It was pretty scary and a big fight, but everything worked out OK. I was very thankful I had a small emergency fund at the time to pay the bills that started showing up in my mailbox.
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    • Mama PoP

      I’m glad that it worked out for you and I sure sympathize with the scary part.

      When I am in the middle of that kind of mess, I often think of the people who don’t know how to work through the system and be persistent until they get results. Our Blue Cross plan would routinely deny things that should obviously be covered and I felt like I was always calling them to fight it out. I once asked a customer service representative if the company simply denied a percentage of the claims randomly on the assumption that some people would not fight the denial!