I was reading comments on older Consumerism Commentary articles and I came across an interesting statement. A reader, who had otherwise good advice to provide another reader who was pondering whether to use an unexpected $100,000 inheritance to pay off a mortgage or invest in the stock market, said the money or a portion of the inheritance should not be used for an emergency fund.
He did concede a “contingency” fund might be a better idea, but I’m not sure I understand the reader’s intended difference between an emergency fund and a contingency fund. Perhaps it’s only in the word choice. Specifically, he said the following:
Emergency fund? Law of attraction at work. If you have an “emergency” fund, I guarantee you will have a lot of emergencies in your life. Let’s have a “contingency” fund instead. Even after paying off the mortgage, she will have a good amount of money left over for BOTH contingency and investing.
Perhaps “emergency fund” isn’t the best name for money set aside, not invested, and available to handle unexpected situations.
Nevertheless, I disagree with this reader. Having an emergency fund doesn’t guarantee emergencies. I can see why one might think that, though.
A feeling of security encourages risky behavior. By having money available for emergencies, whether in a liquid savings account or stashed under the mattress, you have a psychological cushion. You know that you’re relatively secure financially and could handle, at least to a limit, financial emergencies. When you feel secure, you are more apt to take risks, whether with your life decisions or your money directly. With the an increased number of risky choices you make or with an increased level of risks for your actions, you could increase the chance of needing to dip into your emergency fund.
I’m no stranger to this concept. By building up savings, I felt comfortable enough to quit my relatively secure day job in favor of putting all of my time into a risky business based around nothing more a website and the advertising revenue it generated. Having money in the bank encouraged this risky behavior, and it could have gone horribly wrong.
Now, I like to think that my human capital is at such a level that had I needed to find a secure form of income, I would have been able to find a job quickly. But I know pretty intelligent and experienced people who had been unemployed for a long time; there’s no guarantee I would have been able to replace lost income quickly.
With an emergency fund, everything becomes an emergency. There should be self-imposed limits on what constitutes an emergency and necessitates a withdrawal from an emergency fund. Failure to plan for events within reasonable expectations does not really constitute an emergency. Realizing at the last minute you didn’t save to buy presents for your kids is not an emergency, even if their crying makes you believe that giving into their demands is the only way to soothe them. Having a rough day at the office and deciding to take a last-minute vacation consisting of a weekend getaway is not an emergency, either.
You can certainly use your accumulated savings to pay for these two types of expenses, but if you have money set aside in a fund designated for emergencies, you’d be better off keeping that cash where it is and looking for a different savings source. Money is fungible, and there’s nothing concrete that separates one type of savings from another assuming the funds are all kept in a similar type of savings account, but emergency savings should be prioritized differently and set aside, untouchable only in certain situations. It may be the case that you’ve only been able to save a little bit of money at this point in your life. Without a fully-funded emergency fund and with no other savings, you have to be careful about your decisions that affect your money.
There’s a chance that an emergency fund turns into a regular savings account, accessible for the smaller so-called emergencies that appear on a regular basis. If they aren’t true emergencies, find another way to pay, the best choices being either other savings or excess cash flow.
The reader seems to give the impression that because of the “law of attraction,” having an emergency fund will invite real emergencies. According to this so-called “law,” focusing on negative thoughts brings about negative circumstances. Of course this isn’t a “law” at all. In fact, it has no basis in reality. Yet it is an observable phenomenon on an individual basis if someone is actively looking to see the “law” at play. I could attribute bad things that happen to me to my negative thoughts as easily as I can attribute good things that happen to me to my positive thoughts because, like most human beings, I have both negative and positive thoughts at varying times. Thus, the “law” is rendered meaningless.
If, however, you primarily have a negative attitude, you’re more likely to interpret events as negative. That’s normal, and it doesn’t need a fancy name. The good news is by having an emergency fund, you are thinking positively about your financial situation. Emergency funds do not cause people to fixate on the negative possibilities. Being able to afford to handle financial uncertainly or what would otherwise be devastation is one of the most positive aspects of a financial life.
If you believe in the “law of attraction,” the positive change in your life brought about by a fully-funded emergency plan, or by thinking about such things like being financially protected, could lead to most positive financial decisions, like paying off your debt and increasing your net worth.
To address the reader’s word choice of “contingency” rather than “emergency,” wouldn’t this interpretation of the “law of attraction” specify that one with a contingency fund has more contingencies?
Do you believe that the state of having an emergency fund invites the incidence of more emergencies?
Published or updated March 7, 2013.