Meaningful Returns

The first rule of personal finance is probably, “Spend less than you make.” But a close second, if not a tie for first is, “Have an emergency fund.” It’s the second one which makes poverty so devastating and tropes about bootstrapping so generally unhelpful. Because it is very possible to abide by the first and yet live in a reality that makes it impossible to abide by the second, unless something awesome happens to you completely outside of your control. (See, at a certain point the “Spend” can’t go any lower, so you might only be able to follow the first rule by a few dollars a month.) And when you don’t have extra cash set aside, all it takes is the slightest of emergencies to set you on a downward spiral that can be devastating.

However, if you CAN afford to save up for an emergency fund (there’s no hard and fast rule, but 3-6 months’ expenses is often a rule of thumb), you may be tempted not to. And I can understand that, because it’s not fun to think about having that much cash set aside and not doing anything with it. And plus, emergencies are by definition rare for those of us incredibly lucky enough to have an emergency fund in the first place.

But you have to have one. You’ve got to. And I want to make clear that it’s not just about emergencies and about actually using the emergency fund. Because having an emergency fund provides the ongoing benefit of margin, and flexibility, and options. You may never use it, and I hope you never have to, but its psychological and emotional benefits are real no matter what.