Why you need an Emergency Fund now more than ever!
Back in September, I wrote a column about the basics of Emergency Funds. What they are, why I have one, etc. I outlined the two different schools of thought and where I fell on that spectrum. The “live dangerously” crowd of personal finance nerds likes to just use a credit card for emergencies and then invest everything else. The more fearful, or sensible, depending on your point of view, crowd says you should have between 3-6 months of expenses in a savings account or readily accessible cash. Then you can invest the rest. Personally, I’m the more fearful type, with 1-3 years of expenses saved in cash at this moment, and boy am I glad of that.
The “live dangerously” crowd was extolling the very low possibility that you would need your emergency fund due to job loss at the same time that the market was down, so you could just sell some stocks and bonds to cover your needs until you were employed again. In the time of COVID, it seems like the perfect storm has hit, and people who lived this way are in a very dangerous financial situation. Job losses are here. The market has crashed. A lot of people right now are wishing they had cash saved up for this torrentially rainy day.
There are three main reasons why having an emergency fund right now is fantastic. If you don’t currently have one, hopefully this article and line of thinking can help motivate you to build yours.
Reason 1: I don’t have to sell my stocks when they’re down. Right now I am not even looking at the value of my stocks and bonds. With 1-3 year of expenses saved up, I don’t need to draw from the money in the account, so its value at this moment doesn’t matter. In fact, I’m still getting dividends, even if they’re diminished, so it’s buying at a steep discount. I should be buying more right now, but for my mental health, I want to keep my emergency fund as flush as possible, which means deferring buying for a bit. I may miss out on some stocks on sale, but I need to sleep at night more.
Reason 2: I don’t have to worry about losing my job, in fact, it’s giving me the possible opportunity to take a sabbatical. I have a contract for the next two years. The catch is that it’s at a school in China. A great school, which I’m sure will survive this struggle. But I’m not positive I’ll be able to get to China, if international travel continues to tighten. So, I’m gearing up for that job to evaporate. Because I have my strong emergency fund, I can take a year off. A sabbatical to hunker down and ride out the storm without a lot of responsibilities sounds pretty great. There will be a hammock involved. Instead of looking at a lack of a job with fear, I’m seeing it as an opportunity.
Reason 3: Building it gave me valuable financial skills that are highly applicable in an emergency like this. You can’t build an Emergency Fund without knowing some key financial skills. You have to know how to track your spending, cut your spending, and live below your means, or you’ll never save enough to have a strong emergency fund. All of those are critical right now so you can weather this storm and come out the other side.
I know I’m very lucky to have a job. I know I’m lucky to have my health. I know I’m lucky to have a roof over my head. If you’re similarly lucky, use that luck and build your Emergency Fund. You’ll be glad you did, if not for this Emergency, then for the next one.
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