What’s The Purpose of An Emergency Fund?

Last week I had a $400 emergency. Actually it was more like a $513 emergency, and was left-out of work for two weeks. Fortunately I’m prepared for a situation like this, because I’ve been funding a small emergency fund.  And therefore had to withdraw some money from it.  Last year, it was reported that an average of 34% of respondents with an income less than $40k/year would be able to cover a $400 emergency.  Which means paying in cash, or using a credit card that’d be paid off by the end of the month.

The average number of respondents who reported being able to “handle the emergency” was higher along higher income brackets (e.g., of those making $40k – $100k / year, 62% responded in this way).  Which means that 38% and a full two-thirds (i.e., 66%) of individuals last year, earning between $40k – $100k and ≤ $40k respectively, reported being unable to handle an emergency expense totaling $400.  Furthermore, being unable to handle such an emergency expense was related to putting it on a credit card, and paying it off over time, borrowing money from friends and/or family members, or just not paying the expense all together¹.

So what does this all mean for the typical rideshare driver?

While the article discussed above doesn’t mention the likelihood of incurring an emergency expense of $400 (or more); it’s imperative for individuals in the ≤ $40k / year income class (i.e., most full-time rideshare drivers when factoring expenses) to be ready for the unexpected.

The reason being, aside from killer interest-rates that credit card balances will charge you, is that becoming and maintaining debt freedom is essential to wealth-creation of any scale.  And having multiple monthly payments to various institutions will lead to a vicious cycle of negativity; curbing all hope of mastering one’s finances.

Along these lines, when my personal vehicle was recently towed after being crashed [into] by a stranger, incurring a $513 emergency expense, it opened the flood-gates for Murphy’s law (i.e., if anything can go wrong, it will go wrong).  Fortunately, I was able to pay cash to cover it.  And didn’t have to resort to extracting too big a chunk of my emergency fund (which is really just a baby-emergency fund at this point).

Buffering Against the Unforeseen

In my profession it’s likely that rideshare drivers will encounter unforeseen expenses; and having to face an emergency expense should be withheld as certain knowledge.  A friend of mine recently told me, “that’s a tough business to make money in,” which has surfaced to mind this week.  Because rideshare drivers frequently incur a lot of expenses (e.g., car depreciation, incidents with law, incidents with other vehicles, etc.).

If I’d been stuck with a $513 bill, had withdrawn sufficient cash from my checking, paid it and moved on with my life, this “emergency expense” article itself may not be worth much merit; however, following this dent to my finances a “real” catastrophe occurred, leaving me out of work for two weeks.  As I’ve discussed in other pieces written herein, without the ability to work, a rideshare driver has no income (e.g., when we become ill).

Therefore, my $513 emergency expense grew into a much larger demon; because of the opportunity cost of not having income for the two weeks following this incident, I was forced to confront an $1,833 enemy.  This is how:

 

  emergency expense + opportunity cost = true demon-enemy

or

 513 + 660 * 2 = 1,833 

Whereas the opportunity cost is being unable to earn a weekly income, (times two weeks); however, there’s more to this demon-enemy than that, which I’ll get into shortly.

Now, you may be wondering what exactly happened that left me without the ability to service rideshare trips?  And how does this demon-enemy continue to grow and sprout wings without any additional responses on my part?  Therein lies a very prudent lesson about the true nature of emergencies.  Often times they’re consequences of more far-reaching effect than initially anticipated.  That’s why individuals typically have to resort to taking on debt to “get back to normal.”  Because it’s uncommon for a “$400 emergency expense” to simply be just that.

To spare you a long-winded diatribe about my life, here’s what happened in a nutshell, and the reason why my demon-enemy is one that I continue to battle as I’m writing this piece.  My personal vehicle, after having been towed and repaired to the aforementioned Pound in Brooklyn, was returned eventually to it’s home at the garage of my parent’s house.  Two days later, while traveling to a life insurance medical exam no less, my rideshare vehicle (i.e., the TLC-plated van that I drive in the city) went through a deep puddle on the highway by my residence.  And subsequently wouldn’t start afterwards.

Seeking Perfection Occludes An Imperfect Opportunity

Simply put, because of the series of unfortunate events that I was subjected to, the only reason that I’m able to keep my head (barely) above water now is because of diligent saving for the past few months.  You need to save money, period.

Waiting for the “perfect time” to start your savings account is a disastrous mind-set to embrace.  There’s no right time to begin, especially in this day and age of automated savings apps, investing tools, income tracking websites and apps, etc.  Because when, not if, but when something bad happens, you’ll want to send the demon-enemy slinking back into its deep, dark cave from whence it was spawned.

I too am returning to the resolute frugality that’s been adopted as “normal life.”

So to recap briefly, my sh*t storm consisted of getting caught up in a fraudulent peer-to-peer ridesharing service that ended up with the towing bill shown above (it’s a long story for another time).  After that whole cr*p-taco was consumed, my personal vehicle had to be fished from a tow-pound, occasioning the juicy $500 bill pictured above.  Then my TLC-plated van up and died after being driven through a large puddle, we’ll say; which fortunately was covered by the commercial insurance that’s included in my rental agreement; however, had indeed to be towed away from the highway where it stalled out for $85.

Finally, the company that provides me the TLC-plated rental van decided to charge me $425 upon pick-up of the new van, which is acting as loaner vehicle for the foreseeable future.  All while I’m left unable to generate income to use against these unexpected, unwelcomed, and burdensome expenses.

The demon enemy had gathered it’s second wind, and just as it appeared slain redoubled its demonic resolve with hellish fury to destroy the very fabric of my financial, and all other related, aspects of vitality.  Let’s recap the damage done:

  emergency expense + opportunity cost + secondary expenses = truly evil demon-enemy 

or

Related image 513 + (660 * 2) + 85 +425 = 2,343

 Having over $2k ready to go in reserve is probably a really good idea for anybody, especially rideshare drivers.  And thus my emergency expense becomes calcified within the “expenses” tab of my spreadsheets and bank statements.

They say time heals all wounds, and indeed it’ll be a couple weeks before I’m able to really get back into investing again.  Pending that I stick to my budget from here on out, meticulously.

Fortunately through all of this, I haven’t resorted to pulling anything from my investment accounts.  Because at the end of the day, it’s all about accruing compounding interest; having to resort to pulling from investment/retirement accounts would defeat the purpose.  And although did have to borrow from my emergency fund, I feel as though that’s the reason of having one in the first place.  Lord knows that not having one would’ve meant going well back into credit card debit, which is absolutely unacceptable at this stage of the game.  Also, fortunately I’ve learned to be able to say “no” to doing fun stuff already; a skill which should be coming in pretty handy right about now.

***

How about you?  Have you had to incur an emergency expense of $400 or more?  How did you handle it, did you resort to putting on the credit cards, or pay cash, or some combination of the two?  How long did it take to replenish your emergency savings fund?

 


  1. Mui, Ylan Q.,  “The shocking number of Americans who can’t cover a $400 expense,” The Washington Post, May 25, 2016, retrieved

from https://www.washingtonpost.com/news/wonk/wp/2016/05/25/the-shocking-number-of-americans-who-cant-cover-a-400-expense/?utm_term=.b3c5a456c485

2.  Imp image courtesy of RevRuth’s Rantings blog, at: https://revruth.wordpress.com/category/blog/

 


Affiliate link: 

 

 

 

I’m an aspiring personal finance blogger, and do ridesharing in the greater New York area. Reading, writing, and “fun creative” stuff are my passions; and I’m interested in the topics of saving, investing, and financial freedom.

Facebook Twitter