What the Coronavirus has taught us about emergency funds
Hello fellow Protagonists,
I hope you are looking after yourself and those around you in this challenging time. If there has ever been a need for some teamwork amongst humanity, this is it.
Times of collective and personal emergency can provide the biggest lessons for adventurers, if used correctly.
A lesson on the financial side is to finally realise the purpose of an emergency fund.
An emergency fund is as simple as it sounds; a sum of money stock-piled to keep us afloat when facing an emergency. Many a personal finance book and blog post has discussed the use of having an emergency fund, but how often does a situation occur where the realisation of the importance of an emergency fund show its face.
There may have been times when we have started to save some money for a rainy day and something happens to our hard earned efforts:
We have an emergency whilst saving which drains our funds and we become demoralised so do not start again.
We get tempted to use the fund for something perceived as more fun, or necessary. No matter how much you Photoshop an emergency fund it will never be as tasty as a real holiday.
We feel we are missing out and money is there to be spent. I mean I worked for it didn't I?
A new MTG Arena set drops (Ikoria) - to weed out the true nerds here.
Times of emergency throw the floodlights on to see who has been preparing when times have been more fortunate for us. This uncovers a few thinking traps (cognitive distortions) in our minds, such as the forever fallacy, where we believe that when times are good, they will always continue to be that way. This is an all too common downfall for people who have made vast sums of wealth in a short space of time. They spend expecting for the income stream to continue, and it doesn't.
One of my favourite quotes of all time relates directly to this,
"Only when the tide goes out do you discover who's been swimming naked" - Warren Buffett
In this case "naked" people are those who have fallen to some of the situations and traps highlighted above. I don't want you to be caught skinny-dipping.
Allow me to offer you a pair of pants, so you can be caught in the Buff, but in our way.
We never know when an emergency is going to happen, but they do occur, and rather than placing all your chips on the table, we can have a plan to cover this eventuality. If you keep spinning a roulette wheel, the green 0 will eventually come up. Some people are just prepared for this with some spare chips left on it.
So how do I start an emergency fund? A good place to begin would be in using the cash from your savings rate.
How much do I need to have in my emergency fund? Eventually you may want to consider 3-6 months worth of expenses, in case of a serious emergency. I would only advise that every £1 will take you that one step closer to an emergency fund that provides you with the sense of stability you are seeking. That number will also be different for each person.
What if I am in debt? Depending on the amount of debt you have and the interest that debt accrues will determine where your focus is best placed. Some form of emergency fund is usually preferable as you may be funneling your disposable income to pay off debt, hit an emergency, and have to go into deeper debt to pay out of it.
I can assure you that the stress relief of having an emergency fund is worth every penny. I want you to be able to feel that way.
It is not too late to start one, even when in the middle of an emergency.
Have you started your emergency fund? How did you find building this up? Have you ever, or are you currently skinny-dipping?
Is anyone as excited as I am for Ikoria? Anyone? No? Or are you just afraid to admit it.
GLHF (and take care of each other)