Importance of an Emergency Fund

They’re starting to talk about layoffs at work again, but this time it’s going to be BIG.  I’ve been told I’m very safe from getting laid off but there are a lot of people around me that are going to lose their jobs and it’s going to impact those of us that are left by increasing our workloads a ton.

With all this uncertainty at work, it’s made me think of a neighbor that lived around the corner from me.  I didn’t know this neighbor but, near the beginning of the recession (the second depression), I watched as he lost his job and quickly began holding garage sales almost every weekend to liquidate all his possessions to help keep the power and basic utilities on.  I had heard that he stopped paying his mortgage as soon as he lost his job but he needed enough cash to keep the basic services on over the roughly two years he lived in the house.  Every weekend, I drove by his house and saw them rolling out most of their possessions in to the driveway to try to raise funds.  I can remember feeling bad for them at the time but often thought, “Why did they instantly have to start liquidating?”.

It was clear from the start that they didn’t have an emergency fund or any funds to help them get by in the event of a job loss.  It didn’t help that they bought the house at the height of the real estate bubble and likely had a large house payment.  While I certainly don’t fault them for the situation they ended up in, it has definitely helped reinforce my belief of how important it is to have an emergency fund and to live well within your means.

With all the talk at work about layoffs, I’ve definitely been evaluating our financial situation (even though I’m safe at this point).  It’s during times like this that I’m grateful that we’ve kept our lifestyle inflation in check.  By living on less than roughly 45% of our after tax, after investment income, we’ve been able to amass a sizable emergency/savings fund.  I did some quick calculating last week and laid out a few different scenarios:

I lose my job: We can maintain our current budget with my wife working and get by for about 8-9 years, (if not indefinitely)

Wife loses her job: We can live comfortably on my salary indefinitely and still meet most of our savings goals

We both lose our jobs: We can maintain our current budget for about 2 years with zero income

The reality is that it’s unlikely we’ll both lose our jobs so this gives me a lot of peace of mind.  Even if we both lost our jobs, it would be incredibly unlikely that we a) couldn’t find a new job (we both have significant IT skills), or b) couldn’t pick up temporary work off and on to help stretch the two years out to more like 3 or 4 before we could get back on our feet.  If things really didn’t turn around after a couple years, we have our “armageddon” plan which would have us sell our primary home and move to our second home that we own.  In that case, we could live for many years due to the extremely low cost of living there.

Anyway, as you can see, I’m thinking about what our “fall back” plans are these days with all the instability around us.  While I don’t expect anything to happen, I think it’s imperative to plan for the unexpected.

Our neighbors around the corner ultimately moved out after two years of living in the house without paying their mortgage.  While I’m sure this was a huge blow to them, I did recently see them driving down the road a few miles away.  Yes, even after losing their house and being financially devastated, they’re still alive and breathing.  Life is more than just bills.