Besides losing your job, another argument for building an emergency fund, an on-hand reserve of several months pay, is “budget breakdown.”
Recently we somehow messed up our personal finance spreadsheet and the formula for one month extended to the next, including the next month’s pay.. Looking only at the balances, we did an electronic transfer to pay down the large credit card bill from upgrading our computer setup…
After fixing the formula, we realized that we would be bouncing a few checks unless we acted fast. Irresponsibly, we recently drained our emergency fund to buy stock, so we were forced to take a credit card cash advance, which, for us, is like admitting to hiring a a prostitute, to cover the short-term liquidity crisis.
So the lesson here is twofold. Emergency funds aren’t piggybanks. Hence the name “emergency.” Is the desire to buy more stock an “emergency?” No. So don’t touch it. And even the best budgeting system can break down, so never let it replace your brain completely. Gee, that number seems unusually large. Gee, that number seems unusually small. Maybe I should investigate it to make sure. Think.
(Photo: Tom Simpson)