Today I am honored to present you with a guest post from my boy Manshu. Manshu runs the blog OneMint where he focuses on personal finance, investing and economics. If you enjoyed his post today take a minute and subscribe to his feed. Now on to the post…
How the recession changed my mind on an Emergency Fund
I didn’t believe in emergency funds before the recession, but all that has changed now. While I won’t be stock piling underwear like some people, I do keep a lot more money in my savings account these days because of the recession.
There were three things in particular that changed my outlook on emergency funds.
1. Everything crashed: When the shock came, stocks plummeted, oil crashed, and you all know what happened to real estate. Cash was king and only those with cash or gold felt secure. Most of my personal assets were tied in stocks, and if I had really needed any emergency funds, I would’ve had to sell them at a big loss.
My initial rationale for keeping very little cash: It doesn’t pay dividends or grow like stocks do. But the recession taught me that cash doesn’t crash. I now keep about six months expenses in cash and while it pays very little interest, it is comforting knowing I have that much money readily available.
2. Six months doesn’t cost that much: When I first started contemplating an emergency fund, I decided six months was adequate. When I calculated how much I needed for six months savings, I was a little surprised at how small the amount looked. I thought I was missing something. But it looked small simply because I added up what I thought my monthly expenses are, and not what they REALLY were.
When I was doing my calculation, I didn’t add the $50 I spent on a Wii game or the $70 on Amazon prime, and numerous other little things like that. I really didn’t need all these things and they seem quite wasteful to me now. Looking at the difference between the cost of needs and wants motivated me to not only save, but also cut down on my spending and keep a close eye on where my money is going.
3. Anyone can lose their job: The unemployment statistics continue to get worse as each month passes and a lot of seemingly “secure” jobs have vanished. When I saw a good friend, who was always top of his class and worked really hard, lose his job at a large insurance company – it struck home that ANYONE can lose their job. You can be the most important resource for your company, but if your company itself goes bust, what good are you then? This was a big jolt; I realized unemployment can happen to anyone and all should be prepared for these kinds of emergencies.
The recession is severe and harsh, but it is also a great teacher. It gives you an opportunity to develop good financial habits and be better prepared for the rest of your life.