Although money isn’t something I’ve worried much about in the past, lately I’ve been focusing a lot on it. The reason for this is simple: I’m finally putting my big kid shoes on and moving out of my parents house – or at least doing it soon. The question is, what kind of state do I want to be in when I leave the nest? Do I want to leave in a state of debt and “I don’t know” or do I want to leave knowing that I have something to fall back on in case disaster strikes?
Before I get into that though, here’s a true story about little Fred Tracy from third grade.
Saving Versus Spending at 8 Years Old
I was 8 years old and we had just been told about a cool little program our teacher was using to get us to learn more and do our homework. The program was pretty simple. Basically, we would get points for good attendance and good grades, among other things. Throughout the year, we would be able to spend those points on various events like movie days and field trips. And at the end of the year, we could spend ALL of our points at a classroom auction the teacher was having.
I’m not quite sure what was going on in my little mind, but I must have been pretty excited. I patiently turned in all my homework, did really well in school, and collected as many points as I possibly could. Many other students did this as well. What set me apart, though, was my ability to sacrifice and postpone gratification. I’m not even sure if this is healthy behavior from an 8-year-old, but here’s what I did.
Like I said, I did really well in school, but remember all those cool movie days and field trips? I actually skipped out on them and hung out with the kids in detention. Not because I thought it was cool or anything, I just wanted to save those points! I can remember very vividly sitting in detention with all the kids who couldn’t afford to pay (in teacher points) to go to the movie our class was seeing. One of the first things the adult who was watching gripingly said was, “Okay, you’re all here because you’re in trouble and didn’t do well enough in your class to earn enough points to see the movie today.” I very quickly let him know that this did not apply to me, and that I was gaming the system. 
The moral of the story is this: Even though I had to sacrifice a few movie days and field trips, I got a lot of cool stuff (to an 8 year old) at the end of the year. This is exactly how money works in real life. You save and prepare, and then you profit.
Creating a Fully Funded Emergency Fund
The reason why I’m so excited about saving now is that I just finished (well, almost finished, I wanted to tell you guys about this today) watching a seminar by Dave Ramsey. I have no idea what his reputation is to most people, as I’ve just been exposed to him, but some of the things he has said has already revolutionized my life plan. One of the most important things is the emergency fund.
According to Dave, a fully funded emergency fund consists of about 3-6 months of complete living expenses. That covers food, shelter, utilities, transportation, and so on. It is the stuff that you absolutely can’t live without. This does NOT include big-screen TVs or credit card bills.
Therefore, how much you are going to have in your emergency fund depends on how much you earn and spend now. For me, since I’m still living at home, all I have is one credit card bill (of which I’m paying off completely by next month, more on that later), so I have to project forward a bit and see how much I will need.
To that end, I’m settling on roughly $5000. I have a friend who is essentially in the same situation as me, and she spends about $1000 on bills a month living by herself in our area. Therefore, I’ll have 5 months worth of money in my emergency fund in case disaster strikes.
Why Create an Emergency Fund? Why Not Use Credit?
For most people, their credit card IS their emergency fund. If something bad happens, they just put it on the card and (hopefully) pay it off later. The reason why you shouldn’t do this is simple: credit is stupid. There is almost never a real reason to use credit when you plan your finances consciously and conscientiously. The only excusable situation I can think of is for purchasing a house where you pretty much have to have it and can’t pay all that money up front. Otherwise, stay away from credit. There’s a reason why banks and everyone else want you to sign up for their credit card so badly – statistically, they will make a LOT of money off of you. Even if you pay off the credit card before interest is billed each month, you’re just breaking even. Why not take that money, invest it, and let it gain interest for YOU?
Financial things aside, the real reason to create an emergency fund is peace of mind, and as you well know, that’s what I’m all about. According to some statistics I learned from the seminar, roughly 7/10 people will experience a significant financially draining event in the next 10 years. That’s a pretty small chance to scrape by and be okay not having an emergency fund. Why not be prepared?
This becomes even more important if you have kids and a family. I’ve decided to stay single for, well, ever – or at least until further notice. If you’ve read my articles about relationships then you know why. That being said, if something bad were to happen to me, the only person relying on me, is me! I don’t have a situation where if I become unable to work, my family is going to starve. And yet even I am setting up an emergency fund. If I’m doing that, how much more important is it for someone that is the breadwinner of the family to do it?
How to Use an Emergency Fund
There is only one situation in which you should use your emergency fund. For emergencies! There is no other situation under the sun to use this fund. Ideally, you want it sitting there doing nothing. Don’t use it to invest, don’t use it to pay off debt, and don’t use it to pay cash for that really good deal you just saw. Just leave it be. That’s what it’s supposed to do.
How’s that for simple? I think a lot of people know they should have some money in savings, but it’s not enough at the forefront of their consciousness to actually do it. This is your reminder. Right now, devise a plan to top off your emergency fund (3 to 6 months of living expenses) ASAP. You can’t afford not to.
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Ok,
1.) The ad at the top of the page says “Brazilian Women area Perfect Wives – You will be happy with one of them”. Will I Fred? Will I?
2.) I want to make a crack about you living in your parents basement, soooooo bad! But I will not. Because I’m nice. And it’s just too easy. And I’m better than that. But it’s killing me just a little bit deep down inside.
3.) Your advice is spot on. I found this out when I was right out of college and in quite a bit of debt (for me, it’s all relative). I didn’t earn much right away and collections agents ended up getting involved. I used every spare penny to pay off my bills and after that, I saved whatever I could. Then, one day I realized that I had enough money in the bank to pay my bills for 6 months. And I was free. The sense of security that money gave me allowed me to take other risks. I didn’t save every penny anymore, but had fun. I didn’t make large purchases, but did spent more freely on myself. But I NEVER dipped into that money. I’ve always kept a cash reserve to this day, because I remember the stress of being in debt and I’m not every doing that again. Oh yeah, and I also haven’t had any debt since I paid off my student loans a few years ago. The sad thing is that this kind of spending behavior is rare and unique. My standard of living is fantastic. I just had to wait a few months – one time in my life! – for this kind of freedom forever. Wow.
Hugs!
Melody
Melody | Deliberate Receiving recently posted..Let’s Celebrate Like It’s…Today!
Lol, Melody, those ads are based on what you look at on the Internet. Depending on the websites you’ve been to, and things you search for, ads will appear that will be based on that information. You already knew that you manifested those Brazilian wives a law of attraction sense, but did you know you literally caused them to be there?
Because I’m an American, and thus ignorant of the rest of the world, I figure someone like you in Spain is pretty much the same as being from Brazil. So, maybe YOU are the one who is going to make a great Brazilian wife!
LOL. For your information, we don’t have a basement! I wish we did, because living down there would be totally sweet. Hate all you want, ain’t gon botha me none.
Damn, I’ve never been involved with a collection agency and hopefully never will, but I’ve heard they can be brutal. That’s awesome that you pay off your bills and built up that money. I actually may have some questions for you, as I’m trying to get this whole finance thing figured out.
I’m going to show a friend your comment. I don’t know if she believes me about this emergency fund stuff. Your last few sentences really bring home the point. Thanks.
OMG. Perhaps I AM a Brazilian wife… This changes everything. I’ll have to go and learn how to dance the Samba now. Or wait! Perhaps I already know… And figure out a way to look good in a thong. Oh wait! Perhaps I already do… What reality is this again?
I never hate Fred. I’m a lover, not a hater. Apparently a Brazilian lover. Rowr.
You know what? That experience with the collections agents taught me a lot. First, I avoided the problem. And it just got bigger. They got nastier and more threatening. Then one day, I decided to confront them. I called them up and spoke with an agent. He was really mean and confrontational and I asked him why he was being so mean to me and that just stopped him in his tracks. He just assumed that he was dealing with some low life scum who was gong to lie to him no matter what. That’s how he started to view all people. Once I got him to see me as a human being, we worked out a rather fair payment plan, and I paid off my debt. He then told me that if I ever got into financial trouble again, I should call the company and tell them that I wasn’t going to be able to pay BEFORE the issue actually arises. They will often lower your payment (some money is better than none) to as little as $10/month. This way, you don’t screw up your credit and you keep a good relationship with your creditors.
I used this principle when I got ill and got slapped with a huge medical bill (in the US, obviously). I approached the billing department and told them I couldn’t afford to pay the whole thing (I didn’t wait for them to suggest that or for them to come to me), and that we’d have to set up a payment schedule. But… incidentally, what kind of break would they give me if I was able to cut them a check that day? They reduced my bill BY HALF. And I wrote out the check (a positive bank balance helped with that).
Lesson: Be proactive and don’t assume that people aren’t willing to work with you.
Hugs!
m
Lol Melody.
That is AWESOME about that collector. I’ve heard that, as long as you are making some kind of payment, they won’t mess with you too much. Dave Ramsey says “they won’t shoot a limping horse”.. haha.
I often wonder what would happen if I were to just not pay my credit card at all. They would eventually start sending me offers so that I can pay half or even less of it and have it dealt with. And I honestly will probably only ever need credit for a house. I don’t plan to finance anything else, ever. Still though, it seems too dishonest to do that. I spent the money, so I should pay it.
Yeah, medical bills are huge here, unfortunately. That’s awesome that you got to pay just half of it, and BEFORE they even started bothering you about paying it. Thumbs up.
You are taking some sound, pragmatic steps, Fred. It is vital not to succumb to a “debt consciousness” if you are to experience life riches. In short, we act as we have been acted upon. If we learned that money acts shyly around us (runs away – like the rabbit down the hole), then we are shy around money (we run away from it). If that has been your unconscious strategy – it is time for a change. Become conscious of your attitude around money and you become the cause of your money matters.
rob white recently posted..Tolstoy’s Story of the Three Saints
Hey Rob, thanks for the sound advice.
I’m kind of curious as to my attitude towards money. I’m not exactly sure what it is, to be honest. I come from a family that worries about money a lot, but I’ve never learned to do that. For me, it’s easy come, easy go.
Except, I rarely waste money. At the moment, I budget myself $50 a week to “waste” on whatever I want. This wastes includes anything from fast food to clothing to, well, I usually spend it all on that stuff. And this actually feels like plenty of money for me.
I’m nearing the end of a huge eBay selling extravaganza that I just had. I sold pretty much everything, and I don’t regret it even for a moment. I owe $3000 on a credit card as my only piece of debt. Even though I don’t make very much, I somehow gained enough money to pay it off before the end of January. If I can do it on my now-meager income, anyone can do it.
Of course, I have a sick satisfaction with empty space. I guess the feeling most people get when I see stuff, I get when I see nothing. I like room to roll around on the floor, lol.
I think an “easy” mentality towards money combined with a lack of waste would produce some good law of attraction benefits, wouldn’t it?
Hey Fred,
Great post you got here. Times are moving very fast and sometimes things are very uncertain. We never know what could happen in the next 5 minutes. It’s always important to be prepared. Having an emergency fund is definitely something very handy and good to have.
PJ Zafra recently posted..Sean’s Thoughts For The Week Ahead – 16
For sure, I’m glad I finally really set down to create one. We all have that idea somewhere in our heads, but how often do we actually do it?
Well written Fred and very sensible approach. One tip though, even though you build up and maintain an emergency fund, don’t forget to live and enjoy the things life has for you as well. Too many cases of people saving huge amounts of money for “later” and never really getting around to using it for whatever reason.
One other tip you might find useful, try to find yourself just enough slack every month to save a little extra along the way. I’ve been doing that for a long time, just a couple of percent each month put into a separate account for long term fun stuff, but it can also double up as a secondary emergency fund if necessary.
Living on credit is the pits, it’s just throwing your own money away basically. Now I am totally debt free, no mortgage and no obligations, I’m as free as a bird.
Cheers,
Bart
Bart recently posted..Parenting is not childs play
That’s awesome to hear that you are debt free! I will be by next month too, and I’m very excited about that. I was shocked when I looked at my credit card statement and realized I’d spend $700 on just interest charges in the last year alone. It’s pretty crazy.
Yeah, thanks for the tip. I would probably have a tendency to over save than overspend so I definitely need to watch for that. I will have to find a happy balance between saving and having fun.
See you around Bart!
I’m on the same path!
I’ve been living with my parents and focused on other things, but I’m coming to a point where I see myself moving out finally.
But, I’m not in a desperate rush to, so I don’t see the point of trying to do it in a stressful, debt-inducing way. I’m also planning on having an emergency fund before I take the plunge. It just seems like an intelligent thing to do. And it means if something happens, I get to keep my freedom. That’s attractive.
I’m also curious about my attitude toward money. My parents worry about it, but I go back and forth. Sometimes I do, and other times I can’t find myself to care much either way. But then, I don’t feel the need to have a lot of “stuff” like they seem to. Can constant “stuff”-reduction be considered an addiction?
PS: I was also the kid that insanely good at sacrifice and postponing gratification. I seem to recall a study that suggested that trait in childhood correlates to success later in life. It involved marshmallows.
SWEET! I hope that trait is correlated to success later in life, I can definitely see why it would be. And, the opposite of that trait, that is, the inability to postpone gratification, is correlated with kids turning into serial killers. Eeeeek.
It’s funny how similar we are. Yeah, I’m not in a rush to either. Honestly, I could probably do it this July, or even NOW and I really wanted to, but I like my situation. I basically bounce between my parents house and my main girls house, and that works out pretty well. whenever one gets overbearing, I go to the other. So far, I’m not had a situation where both are overbearing, so I’m set.
Yeah, I think we’re in a pretty good position as far as attitude toward money as well. Neither of us are absolutely obsessed or scared about it, so that’s a good thing. We could probably use some tweaking (and some real-world experience) to help guide our attitude towards it, but that will come in time.
I spoke to my brother earlier, who is quite a bit older than me and very smart with money, I learned some good things. He mentioned how important planning for retirement is after getting the emergency savings done. Lol, I don’t know how I feel about planning for retirement at 23 years old. It’s not exactly sexy, but it is smart. Might as well start now.
Serial killers? Really? That’s bizarre.
Haha! That sounds like a nice set up. I do the same, but I don’t spend a ton of time at my partner’s.
I think real world experience will help, but you’re right–it’ll come in time. I’m about to purchase SBI, so I suspect I’ll learn some things that way!
Hopefully a lot of things, if it goes well.
Can’t hurt! If nothing else, you learn what you need to know.
Hi Fred,
I completely agree with you about not depending on credit card for emergency fund. In fact I am advocating my friends and colleagues about why credit cards are so bad.
Check out this post of mine which I wrote on a niche site
http://dangersofcreditcards.blogspot.com/
By the way, many congratulations on being ranked in 50 best personal development blogs of 2011.
You fully deserve it friend
Naveen Kulkarni recently posted..Release
Hi Fred,
It has been a while again.
Financial trouble is something I am trying to get out of at the moment. Like you correctly pointed out, its worse when family are involved. I now have two young ones and non-working wife that depends on me. The cause of it was of course instant gratification. Boy, ain’t it a hard lesson. But I think we are slowing coming out of it.
Looks like you are on your way forward alone soon. It is definitely prudent for you to create that emergency fund. You never know what might strike. But I trust that you will be very well taken care of by yourself. Perhaps, it is more important for you to start building your fortune and making money work for you. Wouldn’t it be nice to be financially free when you are in your 30s. That’s very possible my friend.
Happy Holidays!
Jimmy recently posted..Beginners Guide to NLP – Part 2 (Pattern Interrupt in NLP)
Jimmy, great to hear from you!
Instant gratification has been a problem for me too – hard lesson indeed. But like you, I’m coming out of it.
Yeah, that will be amazing to be financially free in my 30s. That’s definitely something I look forward to and am trying to make happen at this very moment. But really, I suppose I don’t mind working for a long time, as long as my job is peaceful and serves a useful purpose. Although if I can become financially free, I’m sure I could do something even grander.
Talking about the future like this is fun, I shall be over to your blog soon.. I love learning about NLP.