As I’m nearing the $9,400 mark with my emergency fund, I have started to get more and more weird looks from family and friends. They think it’s really weird that I’m soon going to have $10,000 sitting in a bank account doing absolutely nothing.
I get it, for the vast majority of the population, having an emergency fund of more than a few thousand dollars is kind of a foreign concept, but it really shouldn’t be. Why?
Because shit happens.
All. The. Time.
Let’s look at an example of a friend of mine who really could’ve benefited from an emergency fund.
My friend is a freelancer. We met online a few years ago and we’ve been internet friends ever since. She makes good money, has two kids, a house, two cars, and her husband also works full time. They don’t pay a ton of attention to their money, but they don’t spend beyond their means either.
Freelancers should always have a large emergency fund. Why? Because when your income is variable, you never know when business might dry up and you are left with no money coming in. This is exactly what happened to my freelancer friend.
Scenario 1: Panic, Anxiety, Sleepless Nights
Her freelance income dried up, but they didn’t stop spending, in fact, they didn’t change their habits at all. They put the difference on credit cards and kept the faith that her business would pick up again, as it usually does.
Except this time it didn’t.
In the last email I exchanged with my friend, she explained that she and her husband were running out of room on their credit cards and business was still slow. To top it off, she has an upcoming income tax instalment payment to make and a GST payment to make, and there’s no money for that either. They’d spent it.
Is this making you sweat yet? It’s sure making me sweat, in fact just reading that email gave me anxiety, I can’t imagine being in her position.
Let’s look at an alternate way this scenario could have played out:
Scenario 2: Emergency Fund to the Rescue!
Freelancer friend and husband have an emergency stash of cash equal to three months of her average take home pay. They don’t ever ever touch the money that she is supposed to be setting aside for income tax and GST payments. After all, it’s not their money, it’s the government’s money.
Business starts to dry up, so they react accordingly, reducing expenses, cutting down groceries, maybe even cutting cable for a few months, forgoing dinners out and buying alcohol, because every little bit helps. Their kids want this and that, they regretfully tell their kids no, because the money isn’t flowing right now.
They tap into her small emergency fund, making it stretch as far as possible, which it will, because they have reduced expenses.
No credit card debt, no staying up all night worrying about finding the cash to pay the government. Business will eventually pick up and they’ll spend a couple of months getting the emergency fund back to where it’s supposed to be, and be on their merry way.
If It’s Not Reduced Income, It’ll be Something Else
I used to ride horses, and one of the sayings we had around the barn was “It’s not if you hurt yourself, it’s when and how bad.” We all operated under the assumption that, since we were working with powerful but flighty animals, some day, something would go wrong and one of us would fall off our horse, get stepped on, or run over. Or all of the above. So we took precautions. We kept gates closed, we kept a first aide kit in the barn, we weren’t stupid enough to ride alone, and we wore helmets. Basically we prepared for these bad things to happen. Emergency funds are no different.
It’s not If an emergency happens, it’s When and How Bad.
If you think you don’t need an emergency fund, you are either dangerously optimistic or making excuses so you can spend that money on some stupid consumer crap you don’t need.
Make a plan to create an emergency fund. Do it now, because karma’s a bitch and she isn’t going to wait until you find the time to do it “one day” in the future.