Understanding the Emergency Fund
I read an excerpt from Hand to Mouth: Living in Bootstrap America on Slate that really bothered me. I'm not dismissing the book in general, because there are a lot of crummy things about working in food service industries that need to be fixed. What bothered me was the idea behind this sentence, "It is impossible to be good with money when you don’t have any."
It's true a budget is useless without income. But the article is not really talking about a case of no money, but not a lot of extra money.
There are degrees of poor. Sleeping on the park bench with a newspaper blanket or moving your family beside a dump so you can scavenge is what no money really looks like. Struggling to find food and shelter working a part time job at below minimum wage is not enough money. But if you have $5 spare dollars that isn't eaten by a need, you have barely enough money.
What you do with that $5 is important. Another quote:
"When I have a few extra dollars to spend, I can’t afford to think about next month—my present day situation is generally too tight to allow me that luxury."
Yes, you do have to make it through the present to deal with the future, but you've also used the word "extra". So for sake of argument, you have $5 spare for the week. Do you blow it on a non-necessity or do you recognize your financial vulnerability and hold onto the $5?
If you do the latter, you now have a $5 Emergency Fund. Let's say for the next 3-weeks you are able to put away $5 and so you have $20. Next week you get an unpatchable hole in your only work pants. New pants will cost you $20, and your Emergency Fund is back to $0.
Are you frustrated? Yes. Are you back where you started? Yes.
But are you still employed? Yes.
Now imagine, you've spent your $5 per week on a scented candle, a fast food burger, a beer, and a new CD. Not wild extravagances but things you could have lived without. Now, you have no work appropriate pants.
Do you still have job? (Depends on where you work, but showing up out of uniform for the next 4-weeks while you save, probably isn't helping your career, and taking out a payday loan is going to eat your $5 for several weeks to come until those pants cost you $40.)
But let's say you were a saver and still employed. Two weeks later you have employment, food, shelter, and another $10 in reserve, and your toaster breaks. There's a poor quality toaster on sale for $10. What do you do?
Save the $10. You can live without a toaster. It's not necessity and not an emergency.
When we encourage you to save a 6-month Emergency Fund, we understand it's a process. The tighter you are, the longer it will take. The Emergency Fund is intended to be fluid, going up and down in response to your needs. A small one is better than nothing.
There are certainly things that happen which no one can plan for, but when you're poor (of the living paycheck to paycheck variety), you can't afford not to think about next month.
It's true a budget is useless without income. But the article is not really talking about a case of no money, but not a lot of extra money.
There are degrees of poor. Sleeping on the park bench with a newspaper blanket or moving your family beside a dump so you can scavenge is what no money really looks like. Struggling to find food and shelter working a part time job at below minimum wage is not enough money. But if you have $5 spare dollars that isn't eaten by a need, you have barely enough money.
What you do with that $5 is important. Another quote:
"When I have a few extra dollars to spend, I can’t afford to think about next month—my present day situation is generally too tight to allow me that luxury."
Yes, you do have to make it through the present to deal with the future, but you've also used the word "extra". So for sake of argument, you have $5 spare for the week. Do you blow it on a non-necessity or do you recognize your financial vulnerability and hold onto the $5?
If you do the latter, you now have a $5 Emergency Fund. Let's say for the next 3-weeks you are able to put away $5 and so you have $20. Next week you get an unpatchable hole in your only work pants. New pants will cost you $20, and your Emergency Fund is back to $0.
Are you frustrated? Yes. Are you back where you started? Yes.
But are you still employed? Yes.
Now imagine, you've spent your $5 per week on a scented candle, a fast food burger, a beer, and a new CD. Not wild extravagances but things you could have lived without. Now, you have no work appropriate pants.
Do you still have job? (Depends on where you work, but showing up out of uniform for the next 4-weeks while you save, probably isn't helping your career, and taking out a payday loan is going to eat your $5 for several weeks to come until those pants cost you $40.)
But let's say you were a saver and still employed. Two weeks later you have employment, food, shelter, and another $10 in reserve, and your toaster breaks. There's a poor quality toaster on sale for $10. What do you do?
Save the $10. You can live without a toaster. It's not necessity and not an emergency.
When we encourage you to save a 6-month Emergency Fund, we understand it's a process. The tighter you are, the longer it will take. The Emergency Fund is intended to be fluid, going up and down in response to your needs. A small one is better than nothing.
There are certainly things that happen which no one can plan for, but when you're poor (of the living paycheck to paycheck variety), you can't afford not to think about next month.
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