Sunday, April 29, 2007

ADA: More on the Emergency Fund

Alternate Dimension Andy (ADA):

You're thinking about this emergency fund bullshit. You want more details: how long do I have to worry about this shit? How much money needs to be in this fund? Where should I put this money? What constitutes an "emergency?"

Well, Get Rich Slowly has an oldie but a goody of an article on this very topic. Unfortunately for you, Mr. Roth is of the opinion that you need to decide for yourself what the right amount is. I am of the much more realistic opinion that you are a moron incapable of making such an informed choice.

Sorry, ADA, just call 'em like I see 'em.

This is the paradox of choice: to the uninformed, a slew of options does not constitute a "choice." When you don't know what you're doing, when one option sounds just as good as the next, when you're thrown to the wolves and told to choose what's right for you among a sea of choices about which you have zero knowledge, you're not going to be choosing. You're going to be "picking." You're going to be rolling dice, or picking the option that has the coolest name.

Since I sincerely doubt you're actively learning much about personal finance, since I doubt you currently know the merits of a savings account vs. a municipal bond, I'm just going to give you some answers. This will be the advice that you stick to for the time being. If, in the coming months, you learn more about personal finance (either by reading this blog or by going to a legitimate source), then feel free to make some changes.

The advice I'm about to give isn't law. None of my advice is ever law. It's only a suggestion until you can figure things out for yourself. Here goes:
  • How much money do I need to put away? Go back to the post about budgeting. What are your essential monthly expenses (item #2)? Take this number, add 10%, and multiply by eight. Should you go into emergency mode, you will need to be able to get by for at least eight months. This number is a safe estimate of what it will require for you to get by. I say "add 10%" because I like to err on the side of caution, but in reality, you'll probably need even less than what your current expenses are, since you'll be canceling your internet connection, moving into a cheaper apartment, etc.

  • Where should I put this money? Put it into a savings account at the same bank where you have a checking account. Sign up for overdraft protection, and link that protection to this account. I wouldn't normally recommend a savings account as a place for you to put your money, but since the world of art is feast-or-famine, you'll need very high liquidity (That means "really easy access to all your money").

  • What constitutes an emergency? Don't be an asshole. You know what an emergency is, ADA. If you are put into a situation where something you need to pay for cannot be paid for, take your money out of the emergency fund. Since you're sticking to your allowance plan, since you're not building up credit card debt, this shouldn't be a problem.

    Good examples:
    • Car repairs
    • Lost job
    • Moving expenses

    Bad examples:
    • Totally sweet guitars
    • Vacations
    • Booze

    Also worth noting: once you're in emergency mode, all the rules change. If you've lost your job, you shouldn't be contributing to your retirement fund until you've found a new job. You also don't get an allowance 'til you have another job.

  • How long do I have to worry about this? Until you have enough in your emergency fund. If you ever have to take some out because of an emergency, then put it back in as soon as you're able.
Stick to that emergency fund, ADA. For someone like you, it is entirely necessary.

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