Leave Your Emergency Fund Alone!

Leave Your Emergency Fund Alone!

An artist friend named Linda (we’ll call her that to protect the guilty) has a problem. She’s incredibly talented and creates giant, sweeping paintings that, on average, each sell for more than $2,500.

That’s the good news.

The bad news? She never knows when she’s going to sell the next one AND she’s a “frequent abuser” of her emergency fund.

Linda said to me over coffee recently, “I’m hoping I sell a painting soon. Robert and I decided last night to vacation in Aruba and I have to buy the tickets.”

“That sounds fun,” I responded. “But what if you don’t sell one ahead of time?”

Linda sighed, and said a phrase I’ve heard many times before, “I guess we’ll dip into the emergency fund.”

Emergency Funds: How Much?

First, congratulations to Linda for even having an emergency fund. According to Pitney Bowes in a 2012 study, the average family in America only has around 5,923 in savings. Because of her volatile career/passion, Linda has considerably more. Experts agree that you should examine your income sources to determine how much money to place in your emergency account. If you have a steady pay check and little chance of an emergency, three months of expenses may be sufficient. For Linda, she keeps closer to nine months.

It makes sense: Because as artists we don’t know when we’ll book a job or sell one of our pieces, if we aren’t regularly supplementing our income with a day job, we need to know where our meals are coming from for an extended period of time.

Linda’s Problem: How To Use Your Fund

I asked Linda, “What happens if you spend the money on your trip and then you still don’t sell a painting?”

She waved her hand. “I don’t know. We’ll figure it out.”

Sadly, many artists don’t “figure it out.” The reason people have to give up on dreams is because they run out of funds. If Linda isn’t able to sell a painting, she may have to close her studio, find other work, and limit her time painting….in this case, all for an expensive vacation.

Your emergency fund is your life net. For many people, they’ve never saved this much money in their life, so they look at it as a way to purchase items they’ve wanted or buy experiences that they could never afford without it. Using your emergency fund this way, though, is a trap.

The Solution

To avoid using your emergency fund for everyday expenses, separate it from your everyday budget money. Build up a different account. If possible, try to save money toward it every pay check, or in Linda’s case, contribute a portion of the commission from every painting.

In fact, if you have a spender personality, go one better: save your emergency fund at a completely different bank.

A funny story: One client picked an institution across town from her home (about a forty minute drive) and limited her online, check writing and debit card access. Why? She said that if it was really an emergency, she wouldn’t mind the long drive to retrieve funds. If it wasn’t important, she’d have forty minutes to talk herself out of sabotaging her long term goals.

She never touched the fund.

The Real Point of An Emergency Fund

Emergency funds are all about security.

If Linda decides to use her emergency savings for Aruba, imagine that trip; she may spend the entire time wondering, “What if I don’t sell another painting?” Because she shortened her ability to survive, taking money from her emergency fund may give Linda exactly the opposite of the stress free vacation she desires.

For some of my clients, misusing their emergency fund makes them jittery, nervous, and afraid.

If you don’t yet have an emergency fund, you might be thinking, “I’m used to flying without a net!” You know inside, however, that you have to spend far too much energy and time thinking about today and not enough time planning your future. Most people without savings have difficulty with long term successful planning because they’re too busy looking for their next meal. How many opportunities have come around and you were so busy paying yesterday’s bills that you didn’t even notice?

That’s why it’s so important to build your emergency fund and establish your debt plan, providing the stable foundation of your financial life.

Hopefully Linda doesn’t use her emergency fund for Aruba (I’ll try and let you know what she decides…). However, her story is great in one respect; it reminds us to leave our emergency fund for emergencies.