Personal Finance – The Emergency Fund
The key to building anything is a solid foundation.To build wealth and succeed financially, one of the foundational pieces is creating and living by a budget. Another essential is having a proper emergency fund. I have worked with clients that ask, “If we’re sticking to our budget, why bother with setting up an emergency fund when we could be… (paying off debt, saving for retirement, saving for college)?”
According to a recent study, more than 70% of Americans regularly use or maintain consumer debt and the average balance of that debt is around $38,000!!!! Dave Ramsey often says winning with money is 20% head knowledge and 80% behavioral/emotional. So, to be successful, you have to create great habits and not allow for emotional pitfalls.
One thing we all know is that emergencies happen; they can be in the form of medical bills, car problems, the air conditioning going out in the house, a lost job, or any other surprise that costs money. Not having an emergency fund causes two major problems here… 1) the emotional sabotage and stress associated with these emergencies is multiplied knowing you simply don’t have the money to cover your
bills, and 2) you have to go into debt or increase your debt to survive.
A few years back, I cleaned my garage completely, but left a small pile of boxes in the middle of the garage that I wanted to sort through. I got distracted and didn’t go through the boxes. As time went on, I’d go to put stuff away in the garage and just lazily pile it onto the boxes because they were already in the way. Before long, I had a pile of stuff taking over the garage. How did my clean garage go back to being a disaster? Simple. Psychologically, it is easier to add to an existing pile than it would have been to start the pile in the first
place if my garage had been completely cleaned up.
It is the exact same way with debt. If I don’t protect myself with a properly funded emergency fund, I’ll be forced to go in
debt when those surprises creep up. And once debt is back in the mix, it will so much easier to add that barbeque I always wanted or go on the trip we’ve been putting off. I mean, I’m already in debt, so what’s alittle more? Pretty soon, the debt I worked so hard to clean up is a big pile of mess all over again.
Emergency funds aren’t sexy. They don’t earn you money. They don’t take you to Hawaii. But they protect you from unneeded stress and they build a barrier against the destructive impulsive of debt. Build the foundation properly. Get 3-6 months of expenses put away and leave it there for emergencies!
