10 October 16
Emergency funds seem to be having a moment. Around the world we’re seeing more and more initiatives aimed at helping people set aside money for the unexpected. This makes a lot of sense.
There are so many benefits to building a buffer. Some of these may surprise, though, since they are a lot more about mindset and habits than just having a few hundred dollars socked away for when the car blows its foo-foo valve.
I can think of ten reasons why we need a cash cushion at all costs:
1. It frees up our headspace. Everybody’s got limited mental bandwidth, and it gets loaded down when money is tight. Having funds set aside frees us up mentally to make better decisions. When it’s hard to make ends meet, not having any slackis the equivalent of trying to function effectively without a night’s sleep.
2. It helps us weather the storms. Emergencies will happen, so we need to expect the unexpected. Rainy day funds give us the resilience we need when the storms hit. They’re really a form of self-insurance, where we take on some risks ourselves instead of paying a company.
3. It keeps us from crisis borrowing. Payday lenders don’t exactly charge mates rates. They may seem like the only option in a crunch, but if you crunch the numbers, we’re the ones getting squeezed.
4. It lowers our anxiety. Concerns about what could go wrong, especially about the money we might need in an emergency, typically drive anxiety levels up. A cash cushion gives us less to worry about.
5. It helps our budget breathe. Trying to stretch a household budget too thin is a recipe for difficulty, so budgets need to breathe. Having an emergency fund to fall back on lets the budget, and us by extension, breathe easier.
6. It keeps us on track towards our goals. There’s no point in setting goals if the first unforeseen cost is going to wipe out our progress, right?
7. It allows us to pick the habit. We slip into so many of our habits unawares. Deciding to build a buffer means we’ve chosen one that’s worth sticking with for life: saving.
8. It builds our technique. Saving takes good techniques like making it automatic and paying ourselves first, and those will come in handy as we’re working towards our other life goals.
9. It’s our gateway to investing. The act of building a buffer shows us how to make a surplus, which is absolutely necessary for investment, too. It’s an on-ramp.
10. It shows us how much we can achieve over time. Once we see that we’re in charge and can flow our money where we want to – and not just where the sales folks want – we’re empowered. Just seeing how our regular savings add up and compound gives us more confidence in what’s possible.
As a rule of thumb, Sorted typically recommends setting aside three months’ worth of expenses in an emergency fund. Self-employed folks or those with uneven incomes may want to put away more.
Some time ago I realised that a cash cushion is not something that anyone else can give you. (Well they can, but you may not be able to hold on to it.) My parents once pitched in a couple of thousand so I’d have something in case of emergency. Unfortunately it soon slipped through my fingers because I didn’t change any of my faulty habits with money to be able to keep it.
An emergency fund is something you need to build yourself. And perhaps that’s the best benefit of all: achieving something worthwhile and getting ahead.