Wednesday, March 7, 2007

Why Keep an Emergency Fund?

I have not (until recently) had an emergency fund. I always depended on the stability of my job and excellent credit (to borrow funds in an emergency) as my backup. As I have been working my real estate business, most of the houses I am buying come from people in foreclosure. Why do these people lose their homes? Here are some of the reasons I have come across just in the last 2 months:
  • medical problems cause them to lose their income and they incur heavy debt
  • an elderly, retired women with her house completely paid off decided to go to the new Casino in Niagara Falls and developed a gambling addiction. She spent all her life savings and then mortgaged her house to the hilt and lost it all
  • couples that split (both married and unmarried)
  • people that buy a house based on two incomes and one of them loses their job
  • people that borrow against their homes to start a business that fails
  • a person whose daughter died suddenly and she moved in with her son-in-law to raise small grandchildren
  • loss of a job
  • people that just don't want to deal with their previous home after milking the bank for all that they could (one bought a brand new SUV with the HELOC and didn't improve their home at all)
  • people that bought based on "teaser" ARM's and couldn't handle the increased payments when their rate went up.
  • people that bought houses that were assessed very low and the assessor raised their assessment to the new purchase price doubling their PITI payment (NY property taxes are outrageous)

One common denominator in all these cases was that the homeowner borrowed way more than the house was worth and the banks were complicit in letting them borrow the money. I think the blame is not solely with one party - both parties were stretching the truth of the situation and both lost in the end.

So some lessons to be learned:

  1. Don't borrow excessive amounts against your home
  2. Don't buy a house that is at the limits of what you can afford
  3. Keep an emergency fund
  4. Don't buy a house using an ARM with a low teaser rate
  5. Be prepared to live on one income and try to add a second source of income (like a small business)

1 comment:

Rad said...

nice post. I agree that an emergency fund is essential. I am still working on mine, I got started late. Sorry to hear about the divorce but I'm you and your kids will find a way through it.
best of luck.