I recently experienced a personal novelty; an emergency. Though my working life is (sadly) rather replete with the emergent, outside of the four hospital walls I’d never before become unstuck by the vicissitudes of bad luck.
One of my very first posts was about the financial pitfalls of cars, so it was perhaps fitting that the culprit in this affair was my own automotive wallet-drainer. Cars are a modern Janus; dichotomous beasts that both augment your life (freedom to travel, convenience, comfort, status symbols) yet simultaneously detract from it with their polluting ways and by acting as a monetary black hole.
When it became apparent there was a problem with my own mirth-mobile I did what any modern man would do and Googled a home-brewed solution. Low and behold the hacks and quick fixes fell flat on their faces. With little mechanical know-how of my own, and at serious risk of inducing damage rather than repairing it, I conceded defeat and called a mechanic.
As I watched my vehicular Hector being dragged away by the recovery truck it was not the impending financial blow that was most frustrating. Rather it was the faff factor, the annoyance, the inconvenience of a whole chapter of tasks, dates, timings and organisation that would require my attention. The bill did come eventually though…
To the emergency fund!
Most followers of mainstream personal finance strategy would perhaps scoff at this stage. An emergency? What’s the big deal? That’s what the emergency fund is for! They’d be correct. Except, being the obstinate trailblazer that I am, I did not have a classical emergency fund. I had an Emergency Fund 2.0. My own ‘it’s hitting the fan’ strategy resembling a credit shield wall approach. In short, the spongy debt of a credit card covers most emergencies.
The overall fiscal assault of my car troubles, including a painfully long taxi ride to work, broke harmlessly against those credit ramparts. That’s a four- or five-figure sum, X months’ worth of expenses, I have invested instead of languishing in an easy-access account ICE. Indeed, the more I reflect on events the more I’m convinced that, at this juncture, a traditional emergency fund is a sledgehammer that I don’t require. I have a nutcracker that does the job.
I’m not so wrapped up in my own comforting confirmation bias that I didn’t recognise a warning sign. My approach to emergency funding is, if not playing with fire, certainly frolicking close to some hot embers.
If I suffer high-cost or back-to-back emergencies I may not have the credit required to cover them. If the emergency cannot be dealt with by credit card, I’m sort of stumped. If there is any aberrancy in being paid that month (as happened in October 2020) then I’m poised to suffer some outrageous credit card interest rates.
The strategy is absolutely fallible. It’s a calculated risk that I feel is worth taking. As my own FI(RE) journey / investing adventure is still in its relative nascency, each little boost to keep the compounding snowball a-rollin’ is invaluable.
Emergency Fund 2.1
Although I didn’t feel financially vulnerable during the aforementioned emergency, I did want to shore up the defences some more.
I concluded that the only way to be absolutely safe from every eventual emergent possibility was to have an unwieldy store of cash, a strategy I’m still reticent to engage with. I thought about restructuring things à la Shrink, with his multi-layered emergency fund that is varied along both temporal and geographical axes.
In the end I decided to double down, a phrase perhaps fittingly taken from the gambling world. Where I had one ‘credit shield wall’ before, I now have two. Two lines of credit, from different providers might I add. The total available credit equates to approximately 10 months’ expenditure. The timing of the repayments is staggered so that they occur as far apart as possible.
Thus Emergency Fund 2.1 was born. It’s not impervious; a castle with a wall twice as thick is still vulnerable to sappers, supply chain issues and other structural faults. The strategy should, however, shield me from emergencies that are either high-cost in nature or occur in quick succession.
1 – 0
I think it likely that there’ll be future iterations of my emergency fund 2.1. Nothing much stays static in the rolling waves of life. I may end up being hoisted by my own emergency fund petard at some point in the future. Until then I’m saving on a rather large opportunity cost. Those savings may well eclipse any potential future costs associated with my alternative emergency strategy so, in the great game of cosmic financial karma, for the time being I’ll chalk this one up as a victory for myself.