Financial Friday | The Importance of the Emergency Fund

We interrupt the Vancouver vacation posts with an important Financial Friday post.  The topic today is emergency funds.  Do you have 3-6 months of living expenses saved up?  If you don’t, I highly recommend that you work towards that right now.  Today.  And I would go for closer to 6 months than 3 months.  Your long term investments like a 401k will not help you if unexpected things happen to you, such as losing your job, or your water heater starts leaking.  Which is exactly what happened to us two days ago.

Our water heater was 8 years old.  We got it replaced in November of 2011.  On Wednesday we noticed that it was leaking.  Once a water heater starts leaking, it’s pretty much done.  And you don’t have hot water until you get another one installed.  So I spent yesterday morning calling local plumbing companies for quotes on 50 gallon water heaters with different warranty periods.  The first company came out at 10 am for free to look at it and provide an estimate of costs to replace it.  We will call this Company A.  The plumber, David, showed up right on time.  He called as he was leaving his prior engagement and gave me a 30 minute warning.  Not only that, but his company emailed me my appointment time with a photo of him and his name, so that I know who’s coming and what he looks like.  I really appreciated that since Todd was at work and I was home alone.  Now that’s white glove service!

David from Company A helped me shut off the water to the tank so it stopped leaking.  Then he got to work on his tablet to provide me with some quotes.  They were all for a certain 50 gallon tank but it was three quotes for three different warranty periods (from 6 years to 10 years).  He showed me his quotes and I almost peed my pants.  It ranged from $3,200 to $4,000!  I know we paid $1,200 in 2011 for this water heater, so I was aghast at what it cost through Company A.  He probably saw my face, because next thing he offered financing. 

Because Todd and I have built up our emergency fund (we have more than 6 months of living expenses saved up), we never actually need financing for these types of emergencies.  But I always act like I don’t know finance and ask them to give me the details anyways, for funsies.  Because I like to hear what their pitch is, and what the interest rate is, so that I could calculate how much interest I’m NOT paying, and how much money I saved myself by having an emergency fund. 

He told me that the monthly payment was only $61… for 10 years!  Like I said in my previous Financial Friday post, car salespeople, home loan salespeople, and anyone whose job is to SELL you things will tell you that you can afford something because you can afford its monthly payment.  But what is the real cost to you if you use their financing?  I asked him what the annual interest rate was, and he said “9.9%”.  So I plugged that into my spreadsheet (after he left, of course) and found out the truth.

First of all, even the $4,000 quote at 9.9% APR yielded a monthly payment of $52.64, so his $61/month must have included some hidden fees.  Second of all, if you pay for your water heater with their financing over 10 years, you paid $6,265 for that water heater, rather than $4,000.  You are paying $2,265 in interest.  That’s steep, my friends.  And the water heater probably won’t even last 10 years!

So I called Company B plumbing to come out.  I spoke to a nice lady named Sarah on the phone, and she gave me a verbal quote of $1,422 for a 50 gallon tank with 8 years warranty.  So this price was more like it!  They sent a nice plumber named John out and he also was on time and arrived around 1:30 PM.  He evaluated the situation and told me the replacement 50 gallon tank with 8 year warranty would be $1,780.  Say what?  I asked him “What’s the difference between the price you just gave me, and what Sarah quoted me on the phone?” And he asked, “What did Sarah quote you?”  I said, “$1,422”.  Then immediately he said, “Ok, then I’ll honor that price that Sarah quoted you”.  Dude…. really?  I was actually thinking to myself, wow, I should have said, “Sarah said it was $600, and that you gave out free chocolates”.   You guys!  Beware of such tactics!  They’re making money off you and the price is ALWAYS negotiable!

So John went to get the new tank and came back to install it.  It took him about three hours to take out the old tank and install the new one.  At the end, I asked what forms of payment he took.  He said, “cash, check, credit card.”  So of course I used a credit card.  We get cash back, and it’s like a floating loan until the payment is due.  We always pay our credit card statements in full.

So the moral of this story is three fold:

1. Build up your 6 month emergency fund so you can pay for emergencies like this.  Taking cold showers is no fun!  Store your 6 month emergency fund in a savings account or money market mutual fund.
2. Always get multiple quotes so you can get the best price.  (In this case it was a difference between $3,200 and $1,400!)  And ask for discounts, coupons, specials.  Negotiate the price or at least ask for a little less.
3. Paying for an emergency like this with financing will cost you dearly.  See #1, build up your emergency fund.