Alison gave the nail a final emphatic thump with the hammer, then carefully hung the picture frame above the sink. She stepped back to admire her handiwork and noticed the picture tipped a little to the left.
A car horn honked impatiently. Alison sighed, grabbed the handle of her trusty road warrior carry-on suitcase, and bolted outside. If the traffic gods were smiling she may still make her flight.
As the taxi drove off, the glass-fronted picture frame tilted further to the left.
Its momentum ripped the nail from the wall.
The frame smashed onto the mixer tap, causing a torrent of steaming hot water to pour over the pile of broken glass fragments now blocking the sink.
Monique locked the door of her electric bicycle store. She cast a wary glance over the promenade at the threatening sky above the river.
Her husband commented that it looked like a bad storm would hit later that evening.
He had a gift for stating the obvious.
Leontine swore like a sailor as the water level in the shower tray rose up above the chipped nail polish on her toes.
The drain was most likely clogged with hair. Again!
She angrily shut off the water, grabbed the bottle of “sink and drain unblocker”, and poured the whole lot down the shower plug hole.
The instructions on the back of the bottle said to leave to work for 15-30 minutes then rinse with hot water. For tough blockages leave overnight.
“I’ll show this f*cking blockage what tough is!” she muttered as she stomped off to get ready for work.
Andrew was internally effervescing and giving himself mental high-fives.
The hospital representative gave Andrew a knowing smirk as he signed off on the business continuity insurance policy they had been negotiating for weeks.
Andrew didn’t care, mentally he was already spending his bonus. It should be huge!
So what if the hospital administrator had insisted on a last minute change of wording to replace “hospital” with “hospital precinct”? They meant basically the same thing, right?
As he drove away from the hospital car park the first few spots of rain spattered on his windshield.
24 hours later
Alison’s mobile phone vibrated angrily across the meeting table. She glared at it, then ignored it.
Moments later it buzzed to life again. The assembled CEOs she was presenting to looked on with amusement, before one suggested she answer it in case there was some dire emergency requiring her attention.
It turned out there was.
Her next door neighbour informed her that he could see condensation covering the floor to ceiling picture windows either side of her front door. Upon further investigation, he could see 3 inches of water on the floor of her townhouse, and it appeared to be rising.
She had better come home. Now!
Monique’s clock radio turned on at 06:00. She drifted awake to the urgent tones of the radio newsreader announcing that record rainfall had been recorded overnight, causing resulting in localised flooding downtown after the river her burst its banks.
She launched herself out of bed and was heading out her front door, when she heard her half asleep husband observe that their shop was downtown next to the river.
Leontine luxuriated in a long hot shower, uninterrupted by that bastard blocked drain.
She towelled herself off, then walked across the floating wood floorboards towards her wardrobe.
Her feet felt wet. Strange?
She glanced down at the floor, and observed water on her toes, still decorated with the chipped nail polish.
Leontine bounced up and down, and saw a long line of water squeeze out of the gap between the floorboards.
“What the f*ck?“
Andrew awoke with the mother of all hangovers.
He was still wearing yesterday’s business suit, now flecked with vomit and what might once have been Nachos. That last round of tequila body shots at the Mexican bar last night had been a big mistake!
After a quick shower and a change of clothes he felt slightly more human. He dashed through the torrential rain to his car for the drive to work.
On the car radio, the announcer described scenes of chaos and destruction throughout the city after a major hurricane passed by during the night.
Listeners seeking medical attention were advised to head towards to hospitals in neighbouring towns, as the local hospital precinct would be closed indefinitely after the hospital roof blew off and destroyed several neighbouring outbuildings.
Andrew vomited on himself again.
1 week later
The entire ground floor of Alison’s townhouse had been damaged by a combination of the water and the steaming humidity. Plasterboard, insulation, skirting, flooring, doors and furnishings had all been destroyed.
The townhouse complex she lived in had communal buildings insurance, which covered the external structures of each dwelling. However everything inside the bricks, above the foundation, and below the tiles was Alison’s problem.
Alison did not have contents insurance. She had not yet got around to organising it, buying the townhouse had been expensive and she had lacked the cash flow to pay for everything all at once.
The river had flooded Monique’s shop. It took nearly a week for the floodwaters to recede. It was a further two weeks before the insurance company was able to provide a rented pump to drain the basement storeroom.
Her entire inventory of imported electric bicycles had been destroyed.
Monique did have business continuity insurance.
The “sink and drain unblocker” had certainly done its job for Leontine.
It was so tough that not only did it eat the hairball blocking the wastewater pipe, it also ate through the pipe itself!
That long hot shower Leontine had so enjoyed resulted in hundreds of litres of water escaping underneath the shower tray, and pooling along the concrete slab supporting her second floor flat.
The water leak ruined Leontine’s solid oak hardwood flooring, plus the skirting and plasterboard of her walls.
Leontine did have contents insurance.
The passing hurricane had ripped the entire ceiling off the hospital Andrew had underwritten.
The airborne roof took out a several outbuildings, collectively housing the private medical practices of more than 800 specialist consultants!
A business continuity insurance claim was filed that covered all of them, the difference between “hospital” and “hospital precinct”. Sized in the high eight figures, this ended up being the largest ever claim made against the insurance company by a considerable margin!
Andrew lost his job, fired for ably demonstrating a spectacular level of incompetence.
He did not have income protection insurance.
3 months later
Alison and Leontine ended up with unliveable homes due to water damage, together with the risk of mould and damp. They needed to line up alternative accommodation while attempting to make insurance claims. Both would potentially need to draw on an emergency fund to house and feed them in the interim.
Alison attempted to make an insurance claim on the townhouse development’s communal buildings policy. Within a couple of days the insurer dispatched a loss adjuster to determine whether the damage was caused by a fault with the building. Once they determined that it was not, they wished her good luck and departed.
She now had a problem. Poor prioritisation had led Alison to skip taking out contents insurance, leaving her to totally self-insure the losses she has now incurred.
If she couldn’t afford the insurance, it is difficult to how she would be able to finance the repair work necessary to restore her townhouse to a safe and liveable state. That is no longer an emergency, it is just poor financial planning!
Leontine submitted a claim on her contents insurance. It was rejected.
The next day she tried again. It was rejected again.
A week later she tried a third time. Once again it was rejected.
Nearly a fortnight after discovering the water leak, Leontine filed a claim for the fourth time.
This time she made a very public fuss on social media, and threatened to go to the press about thieving dishonest insurance companies automatically denying all claims as a matter of course.
This touched a nerve, and a loss adjuster was dispatched to investigate. They quickly determined the cause of the leak.
Once Leontine was able to show them the instructions on the back of the “sink and drain unblocker” bottle stating that the product could be left overnight, the insurance company accepted her claim. They separately pursued damages against the drain cleaner manufacturer.
Eight weeks passed since the flood, before Leontine was able to move back into her newly repaired and redecorated second floor flat. Including providing her with alternative housing, the total repair bill paid by the insurer was close to £30,000.
Leontine’s insurer refused to reimburse her emergency accommodation costs incurred between the water leak and their acceptance of her the claim. Her emergency fund financed this.
Monique couldn’t run her business. She had no alternative means of earning a living until the shop could be repaired, re-stocked, and re-opened. Given the bikes were all imported, that would take months. Her emergency fund needed to cover her personal outgoings until her business continuity insurance started to pay out.
The insurer’s loss assessor concluded a week after the flood that her business premises were a total write off. The building in which she rented her premises had suffered structural damage and would require significant repairs if not outright demolition.
The loss assessor pointed out she had a small turnover (there isn’t a huge demand for electronic bicycles) and barely made a profit. He offered her a settlement sufficient to pay out the shop’s lease and get on with her life trying something new.
He didn’t have to ask her twice!
It is important to recognise that business continuity insurance typically only pays enough to cover any fixed costs and whatever net profits the business may expect to earn while the premises are out of commission. This is very different figure to turnover!
After expenses Monique’s electric bicycle store didn’t make much profit, so the insurance settlement simply provided her with an early exit from her shop lease and a (very) little bit of money to start over. This amount almost, but not quite, covered her living costs from the time of the flood through to the settlement being paid out.
Andrew quickly became infamous throughout insurance circles for his career ending error. Soon he was both unemployed, and unemployable.
Had he possessed an emergency fund, it would have been used to support him while he sought alternative employment.
With no means of earning a living he quickly exhausted his savings. Then lost his home.
He now lives in his car and works for minimum wage as a night shift supermarket shelf packer.
Some thoughts on emergencies
There is no doubt that in all four case studies the individual was greatly inconvenienced by an unexpected event. They incurred material losses as a consequence.
In all four instances an emergency fund would have proven very useful to tide the individual over until a more permanent means of resolving their issue could be put in place.
What does that look like in practice?
For mine, an emergency is both unpredictable and unexpected.
An emergency fund is like a paramedic applying a tourniquet to staunch a bleeding wound, keeping the patient alive until they can receive further treatment at the hospital.
Shortly afterwards a trained doctor professionally cleans, stitches, and dresses the injury; providing a more permanent solution to aid the patient’s long term recovery.
Ironically those who need emergency funds the most are those who can afford them the least.
… those who need emergency funds the most are those who can afford them the least.
People with low financial margins of safety have the greatest need for an emergency fund:
- low or illiquid net worth
- small, inconsistent, or unreliable cash flows
It doesn’t take much for the unexpected to cause these folks to suffer a financial wipe out.
The greater your free cash flows, or the more accessible your net worth, the less you need a formal emergency fund.
What works for me?
Everyone has differing views on how much is “enough” when it comes to emergency funds, or indeed whether they are required at all.
As a semi-retired business owner I experience a somewhat lumpy earnings profile. Some months my bank account sounds like a slot machine paying out a jackpot. Other months all I hear is crickets.
Some months my bank account sounds like a slot machine paying out a jackpot. Other months all I hear is crickets.
My emergency fund helps smooths the ride. At times it has been useful to be able to get my hands on cash, without needing to wait for share sale settlement periods or BACS transactions to clear.
I maintain an emergency fund in a fee free, accessible, current account that has both debit card and internet banking access.
That account is held at a different institution, with a separate banking license, to the bank I use for my day-to-day banking.
This provides a contingency that has proven useful when:
- my normal bank couldn’t process transactions due to gremlins in their systems
- my account access was been blocked due to fraudulent transactions and identity theft
- my travel credit card was blocked while I was travelling overseas
I used to maintain an emergency fund level capable of meeting my family’s living costs for 6 months. If I didn’t have a “plan B” put together by then, I was doomed!
Over time my reliably recurring passive income streams increased, and I adjusted the basis for my emergency fund.
These days I keep enough set aside to cover last minute flights back home for myself and my family, plus a bit more. With elderly loved ones living half a world away, this has proven extremely useful on several occasions in the recent past.
In practice I pay for most things on a rewards credit card. However the nature of those types of trip mean the duration is uncertain, and the credit card bill must still be paid at the end of the statement cycle.