Three Reasons You Should Have An Emergency Fund
The Titanic went to sea with more passengers and crew members than there were spaces on lifeboats.
“Why would an unsinkable boat need lifeboats, at all,” some passengers might have thought, considering the long boats nothing more than quaint odes to a bygone seafaring era.
Some investors found themselves in a similar position recently. Mutual funds, hedge funds, and money market accounts would never sink, right?
Well, just like a black swan of an iceberg sunk the Titanic, a flock of them flew into the flight path of the market last year.
If you weathered the storm, good for you, but that doesn’t mean you ditch your personal financial lifeboats. You should always have an emergency fund. Experts differ on the exact sum of the fund, but saving anywhere from three to six months of your salary is a good start. You also want to make sure this fund is in something extremely safe: cash, preferably.
Why do you need to have this emergency fund established. Here are three reasons–and some may seem contrarian.
Obviously, the first reason to have an emergency fund is to prepare yourself financially for an emergency. If you lost your job, are between jobs, or face a serious financial stress brought on by an accident or illness, having a chunk of change behind you can get you through this transitional phase.
Another reason to have an emergency fund is that it promotes confidence. Once you have your emergency fund you can be more confident in establishing other tactics in your personal financial freedom plan. That might include starting a trading account, or building your retirement fund.
The third reason you should have an emergency fund isn’t readily evident. Building a emergency fund instills fiscal discipline. When you’re placing money in a savings account and not buying the jumbo plasma screen TV for the kitchen, you’re making a statement. You’re saying your personal financial well-being is more important than a luxury or a status symbol.
We’ll sum this up with a quote from Ben Stein that I found on Debtspiration:
This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.
— Ben Stein, “You Don’t Always Know When the Sky Will Fall,” NY Times, 2008-10-26
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
