Life is full of unexpected surprises no matter who you are. There is a common misconception that the more resources, capital, and assets you have — the less likely you are to be hurt by the ravages of the unexpected.
The truth is, the more you have going for you, the greater your chances are of experiencing unexpected surprises that invariably lead to expenses that you didn’t plan for are to occur.
The only real difference between those who seem to attract bad luck and those who don’t seem to is — those who appear to have fortune on their side have a tendency to be ready when things get really bad.
What is an Emergency Fund?
The fact is, no matter who you are, what kind of organization you run, or however successful you may be, there is one important resource that is essential to get you through any unforeseen turbulence — an emergency fund. An emergency fund is an extra stash of money set aside and left untouched except in the event of an unplanned emergency expense.
An emergency fund should be built up and left alone for the specific purpose of carrying you through a period when funds are low, or the influx of cash is temporarily suspended. Experts vary in the suggested amount you should have in your emergency fund, but a good place to start is anywhere. Save a couple hundred to be able to cover that car expense. Then, be diligent and work to get the fund up to be able to cover three months’ of expenses. From there, most agree that three to nine months’ expenses are a feasible emergency fund.
Common examples of an emergency fund are:
1.) Unexpected job loss
2.) Medical infirmary
3.) A sudden need for home or business repairs
4.) The breakdown of capital essential to your business process, ex. computers, vehicles, etc.
5.) Unexpected travel expenses
6.) Natural disasters
Of course, these and many other types of unexpected expenses can come up at any time — that’s why they’re unexpected — they are hard or impossible to anticipate.
Why is it so Hard to Save up?
The reasons that it is so difficult to save up and hold on to an emergency fund are largely psychological. Unlike a given material asset, an emergency fund is by its nature abstract. A material asset is a specific physical resource, like an appliance or a fleet of vehicles, which is always there for a specific purpose. When you ask why it’s there the answer is apparent in the very nature of the resource. Money is very different. An emergency fund is a ‘liquid asset.’ As such it can be used for anything; to pay a bill, to fund a business lunch, to buy furniture or any number of things that are patently not unpredictable.
It takes a kind of discipline that borders on religious in order to develop the habits needed to successfully create and retain your emergency fund. First of all, you must learn to think of the existence of the unexpected as a singular and tangible force in the world — one for which you are setting up a specific asset to use only in the case of an unexpected expense. It is necessary to think of your emergency stash of money as being like an appliance or a tool — there to be used only for expenses that crop up suddenly.
In the same way that you do not use your clothes washer to drive to work, having an attitude that your emergency fund “cannot” be used for any other purpose except filling in the financial gaps created by unexpected incidences is the essential component of the fund.
It’s a funny problem because the type of thinking that can get us out of so many difficulties and enable us to think creatively is the worst enemy of your emergency fund — the innovative mindset. The innovative mindset is something that we strive to cultivate, something we seek out in partners and employees constantly. But the innovative mindset sees no barrier to spending that emergency fund on whatever it sees as a problem to be solved or thing to be improved.
The innovative mindset is highly resistant to looking at an abstract thing and seeing it as a non-abstract thing. If you have ever succeeded at creating a substantial savings account, and come upon an unexpected, not non-emergency expense — chances are someone near you will have given you a judgmental glare for not being flexible enough to dig into your savings in order to discharge the expense. If you can turn off the innovative mindset only in instances where it threatens your emergency fund you will be well on your way to enjoying the three main benefits of having saved up a significant fund for use in emergencies.
3 Main Benefits of Having an Emergency Fund
1.) Peace of mind
Knowing that you can whether any storm will improve your quality of life.
2.) Curtail compulsive spending
Your discipline will help you get better at avoiding unnecessary spending.
3.) Avoid bad spending decisions
You will scrutinize your spending more closely, becoming more resistant to poor choices.
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