( reading time: 3 min 19 sec )
If there is no emergency, many of us don’t prepare. What is a proper emergency fund for me?
First, you need a clear definition of what an emergency is. It must be something we can financially prepare for. It is also funds we only touch if our definition of an emergency happens. This article will help you develop a definition that fits your goals and security.
We teach four stages of budget freedom, the third being security. What follows is a guide to achieving security by learning to prepare for the possible and avoiding the fear of what if.
Defining emergency for me.
Let’s look at things outside the emergency fund’s scope. We realize a giant meteorite hitting within twenty feet of me could be called an emergency, but no fund will help us if that happens. We cannot call a bee sting an emergency if we are not allergic to stings. We don’t target big things outside the power of a fund and little things that don’t need special funding.
What kind of things need funding? What if we still need to plan for the weekly date night? Would that be an emergency? Early in our coaching practice, we needed a better answer. We understood then and now why someone wanted to call that an emergency.
Is an emergency using our money to avoid a lack of planning? It could be, but most of the time, that aligns more with the philosophy I learned to avoid as a software architect. There is a book called The Mythical Man-month. The concept we learned from this was our tendency to throw resources at problems to make them disappear. An abundance of anything is considered a resource to solve everything. The result is we often waste good resources where they have no impact.
Our funds are good things. We want to avoid throwing good money at everything like it were magic powder, making life’s problems disappear. What starts with good intentions wastes the resources that could have been effective in another application.
Let’s start with this definition and refine it as we go. Regarding an emergency fund, an emergency is something we can set aside enough resources to resolve when needed. The definition still needs more work, but it is a good start.
Needs vs. Emergency
Another thing we want to avoid is making all of our needs into emergencies. Just because there is money sitting there we could use to satisfy a need doesn’t make it right to redefine the need as an emergency. Our emergency fund will become a specialized slush fund if we go down this path.
Now, we are at the heart of this article. What is a real emergency fund? If we are in the crisis phase of budgeting, there are many things we may need to use our emergency funds because there are no other funds. We are not saying the things we funded were emergencies. It just means it was a need, and that was the only funds available.
When we get started budgeting or restart budgeting, it is not uncommon for the emergency fund to get raided. It is helpful to remember this happens because our budget is still stabilizing. These emergencies, in the poetic sense, feel like an actual emergency. They are real needs and need resolution. We benefit by preventing our minds from redefining them as emergencies.
Emergency Definition, Round Two
We learned this definition from another YNAB coach. Adding this to the definition above makes for a healthy functional guide for this budget category. It is not an emergency unless it is.
- necessary
- unexpected
- urgent
If we define something as an emergency that is not necessary, then there are one of two possibilities. One, we would need more funds for an emergency. Two, if there are still enough funds, we might be overstuffing our emergency fund because our subconscious knows we will pull money from there for those types of things. It is better to create a pull fund outside the emergency fund to protect it.
If we could have or expect it, we either need to say no to other things, increase our income, or realize we don’t have that much money for the emergency fund. Mark Butler states a profound truth. He says it is easier to deal with a defined struggle than an undefined one.
The last point was about urgent. If the problem will not change in magnitude over the next week or month, it may look like an emergency, but it may not be one.
Recently, when I shared this with one of our clients, they came up with an excellent idea. They have some ready money which they keep in case of an emergency. When we told them our definition, they said they wrote those three words on the envelope: necessary, unexpected, and urgent. That way, when they are inclined to take money out, they will be reminded to ask if it is a real emergency.
