Real-Life Example of Why You Need an Emergency Fund

Today the Money Blog Network members are doing a group writing project on emergency funds. As such, it seems perfect for me to highlight this CNN story a reader recently emailed to me. It tells of a woman who was making $70k per year, was fired, and within two months, she had to go to a food bank for assistance. The highlights:

When she was laid off in February, Patricia Guerrero was making $70,000 a year. Weeks later, with bills piling up and in need of food for her family, this middle-class mother did something she never thought she would do: She went to a food bank.

I'm saving commentary until later, but here are a few more facts that show why she's having financial trouble:

• Guerrero is estranged from her husband. We don't know the circumstances, but we do know that the breaking up of a marriage can be financially devastating.

• Altadena, California. Expensive place to live. Here's what Sperling's Best Places says about the city:

• Compared to the rest of the country, Altadena's cost of living is 44.99% higher than the U.S. average.
• The income per capita is $33,527, which includes all adults and children. The median household income is $70,673.

Points to be made here:

• If she moves she could probably save a ton of money.
• She was earning a decent amount -- right in the mid-range of all households.

• She has had to take extreme measures to pay for her interest-only mortgage of $2,500 a month. Here we go now, some cold, hard facts. "Interest-only mortgage" screams "bought a house she can't really afford."

• She used her tax refund to help pay many of her bills for the first two months, but now that money's gone. First, she got a refund. Probably a good thing for her since she would have blown the money anyway, but for those who can control themselves, getting a tax refund isn't a good idea. Second, if she wouldn't have had the refund, she would have been in trouble well before two months were passed.

Here's the comment the reader emailed me:

This is a story that fails to get the pity out of me, but it’s a good hard lesson on why savings of at least 6 months should be accessible.

My thoughts:

1. True. You MUST HAVE an emergency fund. Otherwise, you are left to chance if (when?) financial trouble like a job loss comes along.

2. People need to learn to spend less than they earn. Doing this gives an even bigger cushion when financial trouble hits. Seems like this lady was spending exactly what she earned (maybe more -- we don't know what her credit cards look like.)

3. Stories like this will become more and more common as people stretched financially lose their jobs, have mortgage rates re-set, and so on. All the more reason to have a good buffer between what you make and what you spend.

4. I feel sorry for anyone caught in this situation, but she didn't really do herself any favors in the way she managed her money prior to the job loss. Besides, as one reader recently commented here:

I don't mean to be dogmatic, but I just wanted to offer some reminders: 3 billion people on the planet live under $2 a day (grinding poverty) including 1 billion living under $1 a day (verge of starvation) and every day 30,000 children die from starvation and preventable diseases There's poor and then there's poor.

This lady may be down on her luck, but there are billions of people who would trade places with her in a heartbeat.

Comments

[plonkee]

And isn't it also a good example of why food banks are a good idea. Stuff like that is one, of many, reasons why there's poor and then there's poor.

["Mo" Money]

This is a good example of the fact that everyone must expect the "unexpected". If we all took the advice of our Grandmother and saved for a rainy day, we would be better prepared for these events. King Solomon said "only a fool consumes all he has."

["Mo" Money]

This is a good example of the fact that everyone must expect the "unexpected". If we all took the advice of our Grandmother and saved for a rainy day, we would be better prepared for these events. King Solomon said "only a fool consumes all he has."

[FMF]

Mo --

Do you have a verse reference for that? I'd like to use it for something.

[MrAtoZ]

Also a good example of why getting child support is a good idea; where's Daddy's role here in feeding the kids?

[Rick]

FMF: The verse is Proverbs 21:20

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. (NIV)

[FMF]

Rick --

Ok, I have that one. I thought maybe he had another one I hadn't heard of/remembered. ;-)

[Mr. Money]

I always try to use these type of examples for my wife. I try to explain that we need to prepare, because you never know when you will be laid off or when something devastating happen Example: Hurricane Katrina, Fires, Car maintenance and etc... so you have to prepare yourself.

[Steve]

People should have more foresight.She was paying $2500/ month on 70k a year.That's over forty percent of her gross income.A recipe for disaster if you ask me.

[Julia]

Thank you for analyzing this woman's story. I saw it on CNN and it sounds like for the most part, she got what she deserved. We cannot just live our lives expecting that our sources of income will always be there.

I do feel bad for her kids. They may not learn the right things about personal finance.

[Ryan S.]

The problem is divorce is all too common in our society. She fell for the mainstream media lie that getting divorced would be the answer to her problems.

[Nick Simard]

This is a great read. Shocking, really. I recently wrote a piece about emergency funds and quoted a short bit from this entry of yours. Just wanted to say that this is an awesome and informative blog you have and I’ll be sure to consult it in the future.

Cheers,
Nick
RBCp2p

[Stephanie]

Just got laid off (thanks crazy economy!) and while it sucks, it's really helpful knowing that my emergency fund, which was not hard to build up (automatically transferring money to it) can cover me for a decent amount of time. Granted, I want to get back in the working world ASAP, but it gives me one less thing to worry about...now I can just work on finding a new job and not worry about how I'm going to pay rent or feed myself!