When you are learning about how to manage your money, you are often advised to create an emergency fund. Unfortunately, while your financial adviser automatically assumes that this is fairly self-evident, this is actually open to interpretation.
If you have an active mind, a vivid imagination or mercurial personality, you can make anything important to you an emergency. This is especially true if there is an element of scarcity or urgency involved in the matter.
Here is how this scenario usually works out:
- 1. Something shows up for you that has a lot of meaning for you.
- 2. You have the money available and are tempted to dip into your emergency fund.
- 3. You justify your expenditure by saying that it’s only money and that you can build it back up while the opportunity you want to grasp will never come your way again.
When you think about it, an emergency can be anything that you want it to be. When excited and scared by the risk of losing out on something we greatly value, we like to label it as an emergency.
Let’s look at some hypothetical questions about emergency funds to get a clearer understanding of how it all works.
- What is an emergency fund?
This is about 6 months of savings to meet all living expenses. You could live on this amount if you had no other income source. If you have an unstable job or work as an entrepreneur, you might want to save more than 6 months net income.
- What if you have an emergency before you’ve managed to save up much?
You will have to get your money from some alternative source.
- · Getting an alternative payday loan might be the simplest route. You aren’t embarrassed asking family or friends for money and you don’t have to go through the tedious, bureaucratic process of getting a bank loan. What’s more, you can receive as much as $1,250 in your bank account by the next day.
- · You can ask family or friends. They may or may not give you the money. They may give it to you because they have the money and feel you’re good for it or they feel sorry for you. They may not give you the money because you have not proven financially responsible in the past.
- · You can get a temporary day job like a construction job picking up trash around a site, working as server on a banquet night when a hotel is short on staff, or working as a home cleaner, gardener, or repair person.
- How do you define an emergency?
An emergency is any situation that has to be acted on immediately because of some kind of loss or damage by not taking care of things in time.
Here are some examples:
- · You or your loved one are injured or come down with a serious illness and need to get medical help.
- · You have a toothache and need to see a dentist.
- · Your pet is critically ill and you need to go to a vet.
- · Your car breaks down and you need it to get to work.
- · You have something in your house that breaks down— a pipe bursts, the roof leaks, the air conditioning quits when the temperature is over 90 degrees Fahrenheit.
- What is not an emergency?
Just because something is important or urgent does not mean that it’s an emergency. Often these expenses may not be as important as you think.
- · Is getting a new dress for going to your best friend’s wedding an emergency? It can be if you don’t want to be embarrassed at the wedding.
- · Is getting a once-in-a-lifetime opportunity to go to India to meet your guru in person an emergency? If you’re a spiritual aspirant, this may very well appear to be your only chance for spiritual enlightenment.
- · Is paying to join a new business opportunity that has the possibility of transforming your life an emergency? It can be if you’ve been struggling your entire life to make ends meet because you’ve been stuck in low-paying jobs.
With the wisdom of hindsight, we may discover that many of the things we desired are not what we thought they would be.
- · Your friend who is getting married may not even notice your new dress but just be excited that you could attend the wedding.
- · The guru you meet on your spiritual quest may not give you enlightenment but just some insights about it or may be available whenever you want to visit the ashram. Worse still, your guru may be more interested in getting your money than your spiritual salvation.
- · The business opportunity may turn out to be just another get-rich-quick scheme that leaves you in worse financial shape than before.
So for the purpose of keeping things simple, let’s define an emergency as something that has negative consequences if you don’t take proactive action.
Putting Things in Perspective
Life is unpredictable. Bad things have been known to happen to good people. By being bigger than the emergency through having the resources to deal with it, you don’t let it damage your life. Think of it like insurance—when you are paying your premiums it feels like a waste of money. However, when you need to make a claim, you are relieved that the money is available. It’s only prudent to save some of your income and save on some of your expenses to have money available when you urgenctly need it.