One painful lesson of 2020 has been a first-hand demonstration of the importance of having an emergency fund. That strong reminder is still not a guarantee that most people are going to take action to build such a fund. Only about one in four or five Americans were able to rely on an emergency reserve to help get them through the pandemic. According to Bankrate, 72% of Americans don’t have an emergency fund.
Many people think they understand what an emergency fund is, but they don’t realize there are actually two different types of funds that are important to have.
The first is the fund meant for actual emergencies: serious life events like a job loss, a serious illness or injury, or a natural disaster that destroys the family home. This is the emergency fund that financial advisors recommend should hold six to 12 months of living expenses to get you through a major financial setback.
The second is what I’ll call the “big expenses fund.” This is for expenses too large to cover from your monthly cashflow. These costs are not emergencies. They are not unexpected. They are expenses that we know are going to happen. We just don’t know when or exactly how much. These are costs like annual health insurance deductibles, co-pays for medical care, vacations, gifts, and home and vehicle maintenance.
Many of those without a fund would agree that they should have one. Why doesn’t that knowledge translate into action? Some workers are barely managing to cover essential expenses, and likely they just don’t see any way to create an emergency fund. What about those with higher incomes? I suspect that the more money people make, the more complicated the reasons are for not having emergency funds.
I suggest that the problem is not in the amount of money we’re making, but in the word “should.” “I should have an emergency fund” is fraught with obligation, expectation, criticism, and especially shame. These might motivate someone to change for a short time, but they rarely result in lasting change or success.
Let’s try this instead: “I will have an emergency fund.” The word “will” has a sense of inevitability. It carries a high degree of readiness, confidence, and importance. When these three components align on any contemplated change, action is certain to follow.
Here is an exercise I sometimes suggest to clients when they’re looking at making a change. I have them write out three questions: How ready are you to do this? How confident are you in your ability to do this? How important to you is doing this? I ask them to use a one-to-ten scale to respond to each question.
If you don’t have an emergency fund and want to start building one, go ahead and try this around that issue. Then take a look at your numbers. If any are lower than eight, that probably indicates that you’re not ready, not confident, or it’s not important. You could be nine or tens for two of the questions and maybe five in the third one. Any that are less than eight are the ones you want to get curious about. One easy way to start exploring is to ask yourself, “What would it take to be a 10?”
A second tool can help you consider declaring a truce between the part of yourself that is “shoulding” and shaming and those parts of you that have their reasons why building an emergency fund is not happening.
At the top of a blank sheet of paper, write “should.” Then, without giving it a lot of thought, list all the reasons you can think of for creating emergency and big expenses funds. Why they are important, why the timing is right, why you have the ability and the confidence to do this, and every other thought that comes up. Don’t censor yourself; write down everything, logical or illogical. No one else is going to see this.
When you’re finished, take another sheet of paper and write “should not” at the top. Now list all the reasons for not creating the funds: why they are unimportant, why you’re not ready, why you can’t, everything that comes up. Again, no censoring.
Then review both lists from a place of non-judgment, as an unbiased observer who recognizes that each of these parts have their reasons and there’s no part that’s wrong. Look at what answers might surprise you or contain a viewpoint or some information that you’ve never consciously considered.
Then look for a compromise, a way to craft a win-win course of action that will address the major concerns of each viewpoint. It might be saving less per month than what’s ideal, but saving something. Or temporarily reducing contributions to a 401(k) plan and redirecting that money to an emergency fund. There are a number of creative actions that could be taken to solve the concerns of both sides of this argument. No matter how small it is, any step you take toward providing more security for yourself and your family is a big one.
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