Tuesday, March 27, 2007

The Emergency Fund, Reconsidered

So, after receiving my most recent paycheck, I transfered $60 above and beyond my normal savings allocation into the ING account that holds the Mini-E, my little emergency fund, to bring the total balance to $1,000. Saving this $1,000 was not a goal I initially had for this year, but recently, it's become pretty important to me--I think I'm reevaluating my thinking on the emergency fund (I see that Wanda's been doing some thinking on the same topic, which is part of what led me to verbalize that reevaluation).

See, it's the emergency part that seems unlikely to me. I have health insurance. I'm employable. I'm totally lacking any financial dependents (including cars). The likelihood that there would be an actual emergency that would exceed my current financial preparation is pretty small--I talked about that in the earlier post on this subject.

Two things, though, present good arguments for fleshing out my emergency fund anyway:

1) I really, really don't want to increase my reliance on my parents, even temporarily. I like having my own life.

2) While I am unlikely to experience a financially demanding emergency, I am extremely likely to experience a financially demanding life change.

Number two is the important one here. I don't really know what I'm doing with my life. I regularly think about leaving New York in favor of the small city in which I went to college. Grad school, of course, is a big (and expensive) likelihood. The point is, though, that I want to have the freedom to pick up and go wherever it is I decide to go, or do whatever it is that I decide to do, or both. I don't want to have to ask my parents' permission. I don't really want to have to ask anyone's permission.

So I think I may be amping up my goals for this savings pot (more dicussion to follow on that, probably), but changing its stated purpose: it's not so much the Emergency Fund as the Freedom Fund.


finance girl said...

Smart thinkin' putting that extra money aside. Every little bit counts, even an extra $20, as you know. Well, I don't know what I want to do with my life either, but it sure is nice to know that the finances are in order to provide options and that, at the end of the day, is what it's all about.

mOOm said...

Great! Now you are getting it :) So many people out there seem to be stuffing all their money into a retirement account they can't access until age 59 1/2 unless they pay penalties or go the annuity/72t route etc. And you have 35 years of life before then. Why do people seem to want to live paycheck to paycheck (with smoothing from credit cards) until they get to that magical (old age)? If people are looking for financial freedom they don't want to be sticking all their money in a retirement account (though Roth's are more attractive than 401k/403b)

Anonymous said...

That's a great point. I am currently planning on returning to school in 2.5 year or so, even though that's not a given, and I have a savings strategy that will hopefully get me through at least a (small) part of that, at least the living expenses. I think that that it is so important to save for what you WANT in life rather than just some dragon behind the mountain.

3 Things About Money said...

Nice post! My emergency fund is also really a freedom fund, because I have other resources to raid in a real emergency and in my mind, a real emergency probably won't be solved with 1000 bucks. But the discipline of saving it has been invaluable. Some people call it a "ready reserve" or "plane ticket fund". Even though my need to go to Paris on impulse is not an emergency, still, knowing that I am working towards that kind of flexibiity is fantastic.

moneymonk said...

Wonderful Post, well said. I always have controversy when I talk to others about emergency funds. I myself wrote a post about it long ago.

It is entirely up to the individual. I feel $1000 is good enough. I do not know many emergencies that are above that. If so the next paycheck will help it.

It depends on your needs. If you have a large family , of course you may need above $1K

But as long as you are employable and have insurance, what's the point with cash just sitting there.

I remember a quote I use: "A man is rich according to the things he can live without"

plonkee said...

I also think of my emergency fund as partly a freedom fund. I've been renting since leaving college and part of the emergency fund is earmarked as moving costs should I decide to change cities to further my career.

Of course now I'm buying my first house, so I'm stuck where I am for a few years.

Yannick said...

EnglishMajorMoney: Nice post. I got to your post through moom's. Moom has a better name for it, "Freedom Fund" which I think I heard someone call EF that name before.

The cash stake in EF may not give you total financial freedom (my definition is the freedom to either work or not), however, it can give you some peace of mind (maybe Peace-of-Mind Fund?).

In your case, you're very young and very healthy. It's good that you do not have a car and a good health insurance. However, you may need money to pay for deductible of your medical expense, or the living expense during a job change. Everyone will have his/her rain day in life, and "when it rains, it pours". It's much better to at least have some cushion and increase your EF as you grow.

moom: I don't think most people are putting all their dispersible savings into retirement fund. I will check my budget to see if it's too stringent. It certainly does not make sense to either pay 10% penalty to Uncle Sam some day or suffering an unnecessary financial hardship. I agree that Roth is the best as you can withdraw your contributions any time without any penalty or taxes. I started my investment and savings a few years back with a Roth.

Dasha: What kind of program do you plan to attend? You might want to think about it carefully. If it will open the door to a dream career for you, then go ahead. Moneywise, it's usually not worth it, as moom had a nice post a while back.

Lucas said...

I just recently discovered your blog and am browsing some of the older entries, hence the comment four months after the fact.

I have what most people refer to as am "emergency fund," but on the advice of my mother the psychologist, I call it my "opportunity fund." The name change is just a way of saying that the money in there could be used in case of an emergency, or for a trip to visit friends, or to start a business, or whatever. It's basically just a pile of money that sits around earning a bit of interest until I stumble across something that I really want or need to spend it on. This makes me feel pretty good about putting a hefty chunk of my paycheck in there every month.

Right now, I'm putting every extra cent into that fund in preparation for leaving my current job in February and probably moving across the country. (I know I'm leaving so far in advance because it's an event-based organization, and I'm leaving after the next event.) Once I'm through that transition, I'll keep on contributing to the fund every month and wait for the next "opportunity" to come along.

www.crearpaginaweb.com said...

It won't work in actual fact, that is exactly what I suppose.