I have a friend who recently lost her job. She’s not the only income earner in the household, but she does contribute a good bit to the family’s finances. Fortunately, she has a three month emergency fund saved up. However, her proposed management of that fund leaves me scratching my head.
On the day she lost her job she came to me and said, “Well, that’s it. We’re going to have to hit the emergency fund now for our expenses.”
I asked if things were already that bad.
“Well, no, but this is an emergency so it’s time to tap the fund.”
“Have you cut your expenses back so that maybe you can live mostly on your husband’s income for a while?” I asked.
“No. Why would we? We have the emergency fund. It’s for three months’ of expenses so we don’t need to cut our lifestyle down. We’ll just use the fund to bridge the gap. We’ve saved for this eventuality, so we’re going to keep going as we always have. We’re even going on vacation in June.”
“But if you cut back on your expenses for a while, that fund will stretch much longer. What if it takes you more than three months to find a job that pays what you were making before?” I asked.
“It won’t,” was her answer.
I left it at that, but I had to wonder: At what point do you throw in the towel and rely totally on your emergency fund and how much should you try to avoid touching it for as long as possible?
When we’ve gone through layoffs or other financially tight times in this house, we’ve done everything we could to avoid touching the emergency fund. We’ve picked up extra freelance work, taken part time jobs, and scaled way back on items like cable, travel, entertainment, and eating out. Our rationale is that we would rather curtail our lifestyle for a short time and rest secure in the knowledge that the emergency fund is there, in full, if things should get really bad.
As long as we can cut expenses or find other sources of income, that fund remains untouched. It only gets touched if the income dries up, the expenses can be cut no further, or the disasters just pile up too fast to deal with them (a layoff, compounded by a leaky roof, with a side dish of medical problems thrown in, for example). While we’ve had to resort to the fund once or twice, we’ve almost always managed to pull together enough income and expense reductions to keep afloat without touching it at all, or by only withdrawing a small amount to cover us until a freelance check comes in, for example.
My thinking is that you never know how long it will take to find work. A few years ago you might have had a new job in a week. Now, except for certain fields, you’d better plan on a few months. If you’re relying on your fund that entire time, you could be in trouble if your search outlasts your fund. You also don’t know when your spouse might also be laid off, or you might get sick, or you might get in an accident, or any other of a thousand things that can derail you financially. It’s better, in my view, to save that fund for something that cannot be dealt with any other way. If you can reduce your lifestyle or bring in any income, it’s better to do that than touch your fund.
My friend has a different philosophy. She figures that they saved three months of expenses, so they might as well use them. She’s out of work, so she’s going to use the emergency fund to replace her salary. She’s not going to downgrade her lifestyle or look for part time work. To some extent I can understand her point of view. You save for an emergency so why not use those savings when something happens? But what’s she’s failing to consider is what happens if that emergency gets worse? What happens if her husband is laid off, too, she still hasn’t found a job, and the fund is depleted?
She and I differ on our view of an emergency. She defines an emergency as something that will inconvenience her. It will be an inconvenience to cancel cable or switch to a pay as you go phone. It will be an inconvenience to work at Target or try to pick up some freelance work. She would rather use her emergency fund to avoid being inconvenienced. I, on the other hand, view an emergency as something that I cannot deal with on my own. An emergency is when both of us are laid off, there’s no freelance or part time work to be found, our expenses are down to the bare minimum and we’re dangerously close to having to miss a payment on a bill. That’s the time to touch that emergency fund. Only when things can’t be solved any other way will I dig into the emergency fund. It’s safer to keep that fund untouched for as long as possible so that if the time comes that I have to use it, I still have it all instead of having a fund that’s decimated by months of paying for cable, trips, and restaurant meals.
Who’s right? There are valid points to both sides and I think to some extent it depends on your level of risk tolerance (or maybe how optimistic you are). If you’re okay with facing a worsening emergency after your fund is used up, then by all means use it at the slightest hint of inconvenience. If you crave safety and security, you’re better of leaving the fund untouched for as long as possible. So, what’s your opinion? Would you touch the fund at the first whiff of trouble, or would you hold on to the money, finding other ways to make ends meet for as long as possible?