The Value of An Emergency Fund is NOT Just For Emergencies

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Emergency funds, that infamous 3-6 months of living expenses that are supposed to cover you in the event of a job loss, or some other unexpected event.  Financial planners long have advocated them as smart financial planning.  They are right, but they are DEAD WRONG on 3-6 months.  That may have worked before the 2000’s, no longer.

Strive for 12 months…..the economy is changing too rapidly to be covered for less….

Emergency Fund

Image Credit: Insurancenewsy.com

 

I would argue the following for people that have less than 3 months of living expenses (the majority of folks):

  • They are ultra-tentative.  They play it safe and lay low.
  • They “tense up” in confrontational situations.  They may avoid conflict all together.  Impossible to perform in business, sports or any profession when you’re tight vs. loose.
  • No bold risk taking.  Striking out often comes with swinging for the fences.  Failure is avoided at all costs when your paycheck to paycheck.
  • They live by OTHER principles, not their own.  When you operate under someone else’s rules vs. your own, will you be more happy or less?
  • They have an overwhelming tendency to stay “under the radar.”

IF you agree that the above points characterize those without a cash cushion, than wouldn’t the opposite be present for those WITH one?

So let’s think about this:  Having a strong cash cushion, close to 12 months of living expenses means you are MORE likely to…..

  • NOT be content with flying under the radar, they want to be “in the mix.”  High profile, big projects that matter, even with small likely-hood for success
  • Embrace conflict, even if it’s messy
  • Have a clear vision of how you want to contribute, related to the business goals.
  • Are OK taking risks and playing loose.

Is it fair to paint this “opposite” portrayal simply due to one’s checking account/liquidity?  Of course not!  It is one element of many that starts to tilt the deck in your favor….

Doesn’t it make sense that FEAR is a detractor in your pursuit of EXCELLENCE when it comes to performance?  Financial IN-security fuels fear.  Build your emergency fund and start playing loose.  

Leadership Edge

 

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Comments

  1. I’d personally completely disagree with this. I would say that a person without emergency funds is hardly low-risk, and high risk takers wouldn’t want to lock up 12 months of money, because they would see it as opportunity cost.

    Nice to see a different opinion though!

  2. As someone raising a family I see the potential for increased confidence from a larger emergency fund. In this case, the ability to take risks, as you put it, covers more than a narrow business definition. What if someone is working for a large company and realizing its values don’t align with his/her morals? The company might benefit from this employee speaking up, attempting to find a way for success with less compromise. But someone closer to the edge financially, looking out for a family, burdened by student debt, might not feel he/she has the option.

    Tangentially, I believe this line of reasoning also provides justification for a decent social safety net. Society misses out when talented people who never had a chance to build an emergency fund get stuck in low-paying jobs they can’t afford to leave.

    • Excellent points Craig! The social security program I believe is certainly one of the better programs, would love to see more personal finance education in our school system which would also help. And to your point “ethics” education would certainly also help. All the best!

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