Personal Budget: Where's YOUR Bailout?
One of those things you always hear about from financial advisors is that you need to have an "emergency fund". This is a separate account where you put money regularly, and automatically, that's there when the crap really hits the fan: you loose your job, your car dies, the roof caves in, etc....
It makes sense. The idea is to use the emergency fund for those types of things instead of resorting to credit cards. But why do that, when you could be using that money? Well, in a way, you are using that money; you're earning interest with it while it's in your "fund", and your saving yourself the 20% interest (or more!) that you'd otherwise be paying to a credit card company!
Perfectly logical. So, why is it so tough to keep one?
In my opinion, there are a couple of reasons:
- true emergencies happen seldom enough to make the fund seem like a waste of effort
- putting money aside into a separate account, much less leaving it there, is tough when you're already pinching every penny
That's why I feel that the definition of "emergency" should be flexible.
If a household can handle it, their emergency fund should be strictly for "real" emergencies. Those are the truly dire situations where you've lost your job, lost a car, the furnace dies, or some other very expensive event occurs and dealing with it cannot be put off. This kind of emergency fund will seldom be used (hopefully), and will grow quite large over time; that's a good thing.
But this is the kind of emergency fund that carries with it the problems I mentioned, and for the average schmo, this kind of thing is hard to keep up. It puts more of a strain on the weekly budget, and there are too many ways in which credit cards can creep back into the picture.
For households with tighter belts, I feel the emergency fund should have a slightly looser definition. This doesn't mean it should be used to get a new HD TV because your old TV broke and HD is cool; that's called "saving up". But it does mean that you can make mistakes.
How Can You Succeed?
Let me back up a bit...
For most people, getting a handle on their finances and gaining true control over their money is a learning process. If we all knew how to handle our money, then nobody would need a budget! But the thing about learning anything is that you will make mistakes. And how is anyone going to learn anything if making a mistake is destructive to the whole process? How would a chef ever learn to chop if every mistake cost a finger? How would a teenager ever learn to drive if the first minor accident or fender-bender meant a complete cut-off from driving? How could a boxer ever win if the first knock-down meant fighting the remaining rounds with a blindfold!?!?
Well, in this process of learning to live without credit cards, how can anyone succeed if any mistake means resorting to credit cards? How would anyone succeed if small failures result in a crippling blow to whole process that could potentially trigger a repeat of the downward spiral, or even worse, is debilitatingly discouraging!?!
There is never success without setbacks. The only way to succeed is to get back up. The only way to keep going is knowing that you can get up again next time.
The emergency fund allows you to get back up.
In our house, we've been without credit cards since 2008. And we have an emergency fund that we put money into from every paycheck.
A year of being credit card free, and we made our mistake. A couple of major factors led to a neglect of our budget during a critical time:
- The holidays, with all of the family events, visiting, craziness, and (unfortunately) shopping
- A new baby, throwing a huge wrench in the financial and time-management machine
Among all the hustle and bustle of the holiday season, "doing the checkbook" fell lower and lower on the priority list, until it didn't get done from mid-November to the mid-January. Let me just tell you, my gut dropped when we finally got around to it; we were in bad shape. The budget had been blown out of the water, and was then filling our downstairs with toys from Santa, and from us, and wardrobes of seasonal childrens' clothing.
We had used credit cards over Christmas as a convenience, but the balances were now unmanageable. It was truly depressing.
We had two options:
- Take the hardball approach to the emergency fund and allow a credit card payment to be introduced into our budget
- Give ourselves a "bailout"; take from the emergency fund to pay off the balance
Getting Back Up
It wasn't easy, using a big chunk of what we had put away for "emergencies". That safety net would be all but gone, as little as it was.
But this was something we could learn from; we knew the mistakes we'd made. We knew which old habits we'd fallen into. Adding another bill to an already tight budget could be crippling. The only way we could recover properly from this setback, to learn from it, and put in place measures to prevent it from happening again, was to start over.
We'd fallen, but we could get back up stronger.
Our emergency fund allowed us to do that.
It was our bailout.
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