Why An Emergency Fund Is So Valuable
https://play.ht/articles/c500e1ad1f14
You’ve probably heard the statistic: 40% of Americans wouldn’t be able to deal with an unexpected bill of a thousand dollars. You’ve probably seen the recommendations: build up an emergency fund of three to six months’ expenses. It can be a daunting figure; for most of us, hitting that figure takes at least a couple of years of sustained effort, and so we frequently think of it as something distant or even unachievable.
I’m going to go out on a limb, though, and guess that you haven’t read about what really makes the emergency fund so useful, no matter how much money is in it.
The single-point transaction
Most big financial needs that we have are single-point transactions: you need the money for a thing that you buy on a given date. You save up a deposit for a house; you set aside money for your wedding. In each case, it’s a single transaction that’s the focus of what you’re doing — the purchase of your house or car, the day you get married. As a result of the ubiquity of this setup, it’s also how we tend to think about money; you need amount X in order to satisfy requirement Y, and until you hit amount X, you either do without Y or pay for it in interest. If a $10k emergency fund is what you’ve figured out you need, then, you’re not properly set up until you hit that $10k figure.
Except that’s not really correct; it’s just how we tend to think about money. In reality, that emergency fund is functional from the moment you put money into it — the only difference is one of scale.
What is a financial emergency?
This is where the value of an emergency fund becomes clearer.
Let’s say you’re relatively early in the process of saving money into your emergency fund. You’ve only got $500 put away so far, and then your phone dies one morning. You were hoping to sign up for a cheaper monthly package, but now you’ll need to get a new handset and pay through the nose for it for the next two years…except you have $500 in your emergency fund, and both the Google Pixel 4A and the iPhone SE are $400.
Suddenly, a serious problem is nothing more than a slight pushing out of the day your emergency fund hits $10k.
This is what makes the emergency fund different: because it’s your own insurance, you don’t need to think in single-point terms. Your emergency fund isn’t functionally useless to you until the day it can cover six months of expenses, like a savings account for the deposit on a house. It’s a cushion protecting you against anything that costs less than what’s in it. Whether that’s fifty dollars or five thousand, if you have it in your emergency fund, it’s now just an inconvenience from a financial perspective.
You’re still only at $2,000, and your MacBook dies? You can decide on whether to switch to a Chromebook without your personal finances being a factor.
You’re at $5,000, and your landlord wants to give you the boot? You don’t need to worry about how to cover the deposit on your new place while you deal with your old landlord’s bullshit.
If fixing something costs less than what’s in your emergency fund, then it’s no longer an emergency
Instead of focusing relentlessly on getting to the six-month’s-expenses target, give yourself the mental space to celebrate each milestone as you build your emergency fund. You’ve got $200? Great, you’re now covered against anything that could happen which would set you back less than that. You drop all your plates on a poured concrete floor? Well, shit. It’s a pain in the ass to sweep up all the pieces, but you can buy a new set of plates later today instead of eating roast chicken from a breakfast bowl until payday.
You’ve gotten to a thousand? Not bad at all. Unless your car gets horrendously damaged, you’re now able to cover repairs to almost any part of it. It’s at this point that you’re clearly and definitively more financially secure than 40% of Americans.
You now have a month of expenses saved up? Great. At this point, you’re getting yourself insulated against pretty severe shocks that could cause disaster in less well-prepared households. From here onwards, your financial security becomes progressively stronger until you hit the point at which virtually nothing can derail you (barring medical disaster, if you live in the States).
A full emergency fund means you’re almost totally immune to financial disaster
Those people with six months’ expenses set aside are able to absorb multiple financial hammer blows at once with no impact on their day-to-day life. You lose your job, your car craps out on the way home, and when you finally get there it turns out the apartment block’s been condemned and nobody’s allowed in?
Without an emergency fund, that’s a life-altering series of disasters a person might never recover from.
With six months of expenses set aside? You can take out your phone, book a studio apartment on AirBNB for two weeks, call a towing service, and be out of bed the next morning to buy a laptop and some new clothes. You have time to find a new place to live, and once that’s done, you don’t need to rush to find a job, any job — you have enough cash set aside to weather this for months, so you can afford to take your time looking for the right job. You don’t even need to cancel your planned night out that Friday.
A few weeks later, you can drive your newly repaired car from your new apartment to your new job, and reflect on the fact that what should have been the worst day of your entire life was instead just a weird and sudden change of direction.
The only difference between a $200 emergency fund and a $20,000 emergency fund is the scope of emergencies it eliminates. Is that big emergency-fund number looking daunting? Absolutely it is. But you don’t have to wait till you hit that number to feel the benefit; you become more financially stable the moment you start setting money aside.
Figure out the things that would cause you problems, and remember to congratulate yourself when you remove them as emergencies
Like I said above, once you hit $400, you don’t need to worry about your phone dying any more. If it does, you can cover the cost of a new one without changing a single thing about how you live day to day.
Once you hit the price of your preferred laptop, that’s another one crossed off.
Then you hit a month’s rent, then a month’s living expenses. At this point, you could weather a four-week gap between jobs without breaking stride; you wouldn’t even have to forego a night out.
And once you get to six months, you’ve become effectively immune to short-term cash problems. That’s a great place to get to, but don’t forget the things along the way that you removed as sources of financial concern. Your financial security became stronger the day you put in that first deposit.
