The Emergency Fund is too generalized and nebulous to be of practical value in an adult financial plan.
Unless you’ve just landed from Mars, chances are you’re familiar with the concept of the Emergency Fund (EF). Every financial guru I’m aware of preaches the need for an emergency fund.
I do not have an Emergency Fund.
Now, don’t get me wrong, I’m all about having money to cover emergencies. The problem is that the concept of an Emergency Fund is overused and the purpose and scope of the EF is too generalized and nebulous (unclear, vague, or ill-defined). In my coaching, I encourage my clients to get past the EF way of thinking as soon as possible.
I know what you’re saying: That’s just crazy talk. It’s reckless. What kind of money coach discourages implementation of an Emergency Fund?
I ask you this: what exactly is an “emergency?”
[pausing as you name the first few ideas that pop into your head]
Okay, what did you list?
[Everyone starts with job loss but to me that’s a completely different subject and we’ll get to it in a different conversation. Save that thought for now and let’s move on…]
Car needs a major repair? Father-in-law passed away? Little Johnny broke his arm? Washing machine broke down? Roof has a leak? Fido or Fluffy is sick? These are all examples of what might constitute an emergency, right?
I beg to differ. These are not emergencies. These are Known Unknowns.
Think about it… if you own a car, it will break down. If you have a father-in-law and you stay married long enough, he’s gonna pass away. If you have children, there will be broken bones or other injuries. If you own a house, appliances will break and repairs will be needed. These are emergencies only if you’ve been living in a bubble or under a rock. To the rest of us, these are all very real eventualities.
The risk is Known, the timetable is Unknown — thus Known Unknowns.
It is my contention that if you can put a name to it, it is not an Emergency. If you can name it, it is a Known Unknown.
And in the land of financially-responsible grown-ups, those of us who get up and put on our big girl/boy pants, the way to handle a Known Unknown is to budget for it.