The no-emergency, emergency fund?

About a year ago I was struck with a major medical illness. Since that time I have spent time in and out of doctors offices and hospitals. I have had more scans than I can possibly count, and had fairly significant surgery. Thankfully I have an unbelievable employer with unbelievable benefits. I have up to six months of paid leave, (medical benefits continue), and long term disability after that (I hope to get better before needing that).

Being only 28 I never really imagined I’d have a major medical emergency. So I hadn’t really thought about creating a large emergency fund. An article in Kiplinger’s Personal Finance Magazine points out that, Young adults are especially short of cash, with just 30% of them reporting they have a cushion that would last at least three months. An article from MSN Money notes that 43% of households have less than $1,000 in liquid savings. And only three in 10 households have a cash hoard that would tide them over for a minimum of three months. Despite these statistics the facts are clear. The number one reason for bankruptcy is an unforeseen illness or injury and its corresponding medical debts.

But it seems like the advisors are mixed on their notions of emergency funds. Dave Ramsey says to start with $1000. See article.. But that wouldn’t even pay half of my mortgage. David Bach says three months is a good place to start. See article.. Kiplinger recommends 3-6 months stored in money market funds and accounts See article.

But other financial advisors suggest that a stash of cash may not be necessary. An article called The $0 emergency fund suggests that in a world where credit is so readily available it doesn’t make sense to stash money in money market and/or savings accounts that earn such small returns. Essentially the author points out that it’s difficult for families or individuals to accumulate 3-6 months of money for expenses, especially for those families already in debt. And that even if you do save 3-6 months of expenses it still might not be enough to meet your needs when an actual emergency occurs. Instead the author suggests turning to credit cards and HELOCs when disasters strike. I have read this suggestion in quite a few other articles as well. When a consumer asked an advisor on Bankrate.com whether or not he should use a HELOC in place of an emergency fund; the advisor provided a most resounding yes. See article.

Since I have lived through an emergency I have decided that an emergency fund is definitely necessary. My medical insurance is currently covered, and I am still receiving my salary, but I have still paid thousands of dollars out of pocket. These bills include $10-20 for prescriptions, $20 co-pays to more doctors than I can count, and $150 for acupuncture and specialized physical therapy treatments that have continued for months.

My husband and I have set aside 6 months of living expenses in an emergency fund. I think of an emergency fund as an insurance on emergencies. And just like any type of insurance: medical, life, or disability, you are putting aside money for a cause you may never need. You might not die until you’re 99 and, knock on wood, you will never experience a period of disability. So paying for these policies might seem like a complete waste of money. But if you do die, isn’t it nice to know you’re not leaving your family penniless. And if you become disabled isn’t it nice to know that your income will be replaced. And if an emergency occurs won’t it be nice to know you have a little pocket of money available. In times of crisis when someone is sick or injured or something catastrophic has occurred the very last thing you’ll want to worry about or have to focus on is money. Trust me.