Tuesday, October 11, 2011

What Is an Emergency Fund?, or Analogies to Fairy Tales, Part the First

She's a brick ... house.
In a post last week, I made light of the fact that I hadn't ever written a post detailing what an emergency fund is.  Today, I found this picture to the right, which I think fully exemplifies why one should have an emergency fund.

Coincidence?  Almost certainly.  Nevertheless, draw nigh, and I'm gonna drop some knowledge up in here, and I'm going to do so via means of a fairy tale.

Do you remember the story of the Big Bad Wolf  (BBW)* and the three little pigs?  In that story, the BBW is all up in the pigs' grills because he wants to eat them up, and the pigs are all like, "No way, man, we don't want to be eated all the way up," and the BBW is all like, "You pigs totes better get over it because you're about to be in my belly by way of my chompy-chompy mouth."

So the first pig hides in his house made of straw (which is still a pretty good house for a pig to build; most of them just roll around in mud, so you KNOW this pig is already putting on some airs).  The BBW totes huffs and puffs, and faster than you can say "Complications from emphysema," the house of straw falls to ground, and that little pig runs whee, whee, whee, whee, whee all the way to the next little pig's house, which is made of sticks.

The incident repeats, and the two little pigs run to the third pig's house, which is made of bricks, and no amount of huffing and puffing can blow that house down.  The pigs win!  The BBW goes hungry!  Democracy is saved!

What does all this have to do with an emergency fund?  Well, the first two pigs didn't make good choices and didn't consider the future when they designed their living spaces.  When the unexpected emergency came in the form of a BBW, these pigs were worse off than before.  Not only were they out of their houses, but they still had to deal with the BBW.

The first two pigs are kind of like those who handle unexpected, emergency expenses by means of credit cards or cash advances.  If you pay for something on credit, you "take care" of the expense, but you still haven't actually paid for the item.  What's more, if you don't pay off the credit card, you've still got the expense hanging over your head, AND you're now paying interest on that expense.  It doesn't seem too smart to me.***

The third pig, however, knew that he could withstand the BBW because his house was strong.  Similarly, if you have built up an emergency fund, and an unexpected expense comes up, you will be able to weather the emergency as well.

I will provide some specific ideas for how much should be in an emergency fund in Part the Second.

*Yeah, I also think it's funny that this acronym also means "Big, Beautiful Woman."  Actually, that gives me an idea.**
**Note to self: consider a blog post about how the the fairy tale of the Big, Beautiful Woman and the three little pigs relates tangentially to personal finance.
***Conversely, if you are able to pay off your credit card balance in full every month, you're effectively gaming the system.  Good work!

Photo Source


Henry @ TotallyMoney said...

Great post. I really should get round to building up my emergency fund. I always pay off my credit card, but I am probably not in the strongest situation for an emergency

Bryan said...

Hi Henry, I hear you. I probably should have some more in my own emergency fund.