One of the things that attracted me to personal finance and economics is just how many parallels that can be drawn between personal finance and life. There are so many lessons that we can bring over from one sphere to the other.
Do you really need an emergency fund?
An important lesson that I have learned recently is: the importance of buffering. I wasn’t always a big believer in emergency funds,and even today I believe that emergency funds, while useful, are not adequate. I believe that it’s more important to have a solid gap between your expenses and your income, so that you can easily cover unexpected expenses and easily adjust to a loss of income. I also think that it’s very important to live in an affordable home. An affordable home is one where total housing expenses are no more than 33% of net income; if one partner loses a job, the other partner can easily carry the burden for some time, and there is some slack for interest rate increases.
Even with an affordable home and a high savings rate, an emergency fund is still a good idea to have. At least, this is what I think today. Why? Having some cash stashed aside gives you flexibility, which is a very important thing to have. When you have cash on the side, you have the ability to make decisions that you might otherwise not make.
How much is enough? It depends on how risk-averse you are and whether you are also investing your money for the future. If you have a year’s worth of expenses saved up, it might be much easier for you to decide to start your own business, since you won’t have to worry about where bread money is going to come from, at least for a bit.
Perhaps the truth is that “emergency fund” is a misnomer. Better to call it “savings buffer’, which is what it really is.
Buffering in all aspects of life.
This concept of buffering can also apply to so many other things. I used to write my blog posts on the spur of the moment. If you looked in my posts queue, most of the time, there was nothing there. Maybe there would be one post that I had written and had decided to schedule for later that week. 😉 Now I try to keep a whole month buffered for each of my sites. As of the time of this writing (January 14, 2012), I have achieved this for this site but not yet for the two others. Buffering takes a lot more time up front, but once you’ve achieved it you have more flexibility and security.
With buffering, I now have flexibility to write when I most feel like it and not necessarily when I feel like I must. I can get a lot done in productive spurts, and when I am not feeling so well I can take it easy for a bit.
Buffering is also an important concept in technology and manufacturing. Processors use it to achieve greater throughput and manufacturers use it to keep stuff rolling. Buffering applies to so many aspects of life, and while there is such a thing as too much buffering, it is also important to have the right amount in place so that you can maximize your value.
Dear reader, how much buffering is right for you?