Yes, this really is going to be advice on why you should reduce your emergency fund. No, it’s not about spending like crazy. You’ll still keep your money.
Rewind to the fall of 2010, and my parents were going through Dave Ramsey’s Financial Peace University. They had big goals of paying off their car and home debts, and had a lot more money to work with than I did. Since I’d clearly been hit with the “millennial curse” of not finding a job since my university graduation in the spring and self-employment looked like the way it was going to be, my mom suggested I start following along.
Part of their course payment included take-home DVDs and workbooks, so I started watching the DVDs. And if you’re familiar with Dave’s work, you’ll know that one of the very first things he suggests is establishing an emergency fund before you go crazy with debt blasting and retirement savings. Your emergency fund always comes first.
As someone who didn’t have a predictable income and didn’t know if she ever would, this struck me as an incredible idea. The simple thought of having a few thousand dollars set aside made me feel more at ease, so I knew having a few months’ expenses stashed away would make me more confident about my uncertain future.
But Then, I Couldn’t Stop Raiding My Savings
My goal, I decided, was to have three months worth of living expenses stashed away in my emergency fund. It took me a while to get there, but once I did, it felt really good.
But there was one problem: As soon as my money market account set aside as an emergency fund hit that magic number, it could never stay long. I’d either sabotage it by not budgeting well enough because I knew I had a safety net, or I’d make a big purchase without saving up for it first, telling myself I’d pay it back.
It felt terrible to continually raid my emergency fund for non-emergencies, and it messed with my head to be constantly transferring money out of something so important to me. Was I really that bad at making money? Was I so terrible at budgeting that I couldn’t be trusted with large sums?
Subconsciously, I think I was always raiding the account to reduce the amount of money in there because I didn’t like the “emergency” label I’d put on it. Having thousands of dollars set aside for an “emergency” felt like I was putting great importance on an inevitable bad event that would happen to me — and I didn’t want to play into that self-fulfilling prophecy.
As silly as it might sound, I talked it over with a handful of other money-conscious entrepreneurial women, and they totally understood where I was coming from. So even if I am crazy, I guess I’m not the only one.
Renaming the Account and Reducing the Amount
I decided to change the name of my account from “Emergency Fund” to “Financial Cushion,” which feels a lot better. I think of it like a Jedi mind trick.
I found that the trick is to simply reduce your emergency fund. Instead of keeping around $8,000 in there, I just keep $2,000. Enough for a small medical emergency or a car repair, but not so much that it makes me feel like I’m bracing for an inevitably horrible future. Most importantly though, I didn’t just spend the additional $6,000 on whatever I wanted. Instead of keeping it in the emergency account, I allocated it to other savings accounts with different goals, like buying a home, retirement or traveling.
I still have all that money in my possession, but because I’m “spending” it on future goals, I don’t feel like I’m hoarding it in an effort to brace for impact. But, it’s all still there in case I need it. So yes, I’m playing a Jedi mind trick on myself … But if it works, why not?