10 Reasons Why You Need A Personal Warchest

Perhaps you are the sort of person who likes to live life by the seat of your pants! What I mean in terms of personal finance is that you run your money between what comes in and what goes out on a very tight line. Perhaps you assume that since nothing bad has happened to you up until the present, that things will continue to go like this. However, what would happen to your personal finances when an emergency happens that cost you around …… say $2000? What would you do? Do you have enough money saved away to absorb the loss? and when is your next pay cheque coming in?

Let us give you 10 real life scenarios when a personal warchest (emergency fund) would be helpful:

1. Car Breakdown: Engine trouble, a cracked radiator or temperamental electronics will instantly set you back $100’s of dollars. And if you’re one of many Australians who drive with only third party car insurance you’ll have to cop the repair bill on the head. For example, a friend once drove from Sydney to the Gold Coast but suffered major car trouble en route (thanks to his own ineptness!). With no NRMA cover, the car worth nearly $5000, blew its head gasket resulting in $1500 in repairs plus an extra unscheduled two week stay on the Gold Coast! It wasn’t all bad news though. My friend is a surfer and the Gold Coast isn’t a bad place to break down! However, now you see how he could have done with a personal warchest instead of going into debt on his credit card.
2. Computer Crash: It happens all too often, especially if you are Windows user (cough cough). Outside of warranty cover, if your desktop computer dies because it needs a new hard drive or say your laptop battery dies you will need to fork out substantial money to get it back up and running.
3. Urgent Travel: If for some reason you need to urgently fly interstate or overseas, it won’t be cheap, especially because of the lateness of booking your flight and hotel. Here is a real-life scenario: I once worked with a British ex-pat living here in Australia. Sadly, a close relative died suddenly and he had to request time off work and book a flight home all within 24 hours. Asides from the grief, the costly last minute flight, the lost income from work and the mortgage repayments still needing paid, the whole thing would be a big hit for anyone to take.
4. Sudden Health Problem: Assuming you don’t have private health insurance, if you became ill or broke a leg in a sporting accident, unfortunately Medicare won’t cover all the costs. Depending on how far away from the hospital you are the cost for the ambulance alone is substantial. And depending on the severity of your injury you could be in for hefty bills in terms of costs associated with rehabilitation (crutches etc) plus the lost income.
5. Unexpected Bills: Have you ever received an unexpectedly monsterous phone bill? or have you ever been invoiced for something which you bought and subsequently forgot about? or are you one of the 1000’s of motorists sent a nasty fixed camera speeding ticket via the post? If so, your personal finances could easily take a big hit. Ouch!
6. Theft: You should always try to protect your assets – your health, your home, your car and your investments. But if you don’t have insurances or coverage then you’ll be especially wise to set up an emergency fund. Whether its the theft of your car or some other household item… it not that often that you’ll get it back.
7. Accidental Damage at Home: Its no secret that Aussies love flat-screen HDTV’s because over the last few years since they arrived in the market Aussies have gone out and bought them en-mass! Consider though the cost of repair and maintenance to your beloved 40″ plasma screen when the warranty runs out. Your initial investment of $2000+ is too high to simply write off if your screen goes on the blink. Repairs due to a technical problem or smashed screen regularly exceed $500. Often tho, the cost of repairs can be the same as the cost of a brand new TV.
8. Investments Take a Dive: If you rely upon your stock market investments to make money, you especially would be wise to build up a personal warchest in the event of your portfolio takes a considerable drop.
9. Storm Damage to House: Of course you should protect your most important asset by having home and contents insurance but what if you are one of the many Aussies who aren’t covered sufficiently? Could you absorb the cost of roof damage due to a fallen tree and still be able to make mortgage repayments? Think of flooding which could ruin your flooring and kitchen appliances. Tradesman call-out fees and work costs are usually very steep. Remember storm damage won’t be limited to the wild weather experienced in July 2007.
10. Job Loss: To some degree or another, we all live in a state of suspicion about our job security. An economic downturn could cause big employers to lay off workers. How much money have you got in savings to sustain you until you get your next job? Its a very prudent idea that you save up enough money before making a switch to a new job. That way your transition into the new and somewhat unknown territory is made more confidently. In the case that you should lose your current job or simply not transition well into your new job, can result in weeks-upon-weeks of stressful, unpaid job-hunting to get through the recruitment process and into regular paid work.

Its a Flamin’ Good Idea

Of course you cannot plan for every bump in the road but if one of the above were to strike you today, would you reach for your credit card? or have to dip into your major savings account earmarked for your house deposit? There’s no doubt that a credit card is the fastest way to solve most emergency situations that involves money within your credit limit. However, for the purpose of emergencies credit cards can have negative effects on your long-term financial plans.

There are two options:

• Plan Ahead: Earn interest on money set aside for the emergency before it happens.
• React After: Pay interest on amount owed on a credit card or personal loan after it happens.

Why not use money which you actually have stored away for the purpose of emergencies instead of putting yourself in debt. Personal warchest money which you put away should ideally be put in a smart place i.e; choose a high interest savings account which is linked to your checking account. This rules out a fixed deposit savings account which would give you the highest interest rates. But it would be no use in the event of an emergency.

Set a Realistic Goal

So if you’re interested in setting up an emergency fund, ask yourself how much is needed and how much is realistic? For example, open a high interest rate savings account and set your own goal. Perhaps start by adding a small amount of $100 every month for a year. At the end of the year, you’ll have $1200 stored away for a legitimate emergency all the while its earning a respectable level of interest. You’ll be well on you’re way to absorbing unexpected and unwanted costs.