The Importance of an Oh Crap! Fund
Putting a human face on an otherwise abstract concept like financial responsibility is something that tends to create interest. CNNMoney and numerous volunteers have created a personal profile to the “credit crunch.”
Mass media has only two modes: great success or great failure. If it bleeds, it leads. During the boom, it was the success stories. Now, we’re watching the blood in the streets. Whether it’s roses or thorns, the nation’s attention is captured. Media dictates the mood. The average are ignored.
When it comes to finances, sometimes it’s good to be average. It’s good to be consistent and it’s good to avoid extreme downs. One way to do that is to plan in advance for the inevitable bad times. The best way to do that is to establish an “oh crap” fund. This isn’t an emergency fund, it’s for small crises that can wind up being big drains if borrowed funds have to be used.
It kind of mirrors Dave Ramsey’s baby steps of a $1000 emergency fund, but it’s a little different. For what it’s worth, I agree with a lot of what Dave teaches, but I do disagree with him when it comes to mortgages. To me, real estate financing is the exception to the “rule.”
If you’ve followed CNN’s profile on Americans with money troubles, you’ll recognize that many of these financial catastrophes could have been avoided…sometimes with only an “oh crap” fund.
A few posts ago, I mentioned Patricia Guerrero who got blindsided by a divorce and a job loss at the same time. Her “oh crap” fund was small and only a tax refund prevented a major financial catastrophe for one month. She was two months worth of income away from being homeless…with a $70k annual salary. When we last heard from her, she was hiding her Coach purse while visiting the Food Bank.
Some stories are heart wrenching, while others inspire contempt…I had to trade in my Corvette for a Suburban…wahhhh! What a difference an “oh crap” fund would make. The great thing about life is it can always change. The bad thing about life is it can always change. Being prepared can minimize the negative fluctuations of change.
Dave Ramsey argues for a basic emergency fund of $1000. I suggest that fund is contingent upon your liabilities. A college student for instance could probably get away with a $250-$500 fund for car repairs, while people like the Copes could have used at least $10,000 in short term savings for home repairs or other unpredicted emergencies.
The “oh crap” fund is not a replacement for a true emergency fund which is 3-6 months of total monthly expenses. In a downturn, this fund should be larger. In an upturn, one can get away with less. In today’s environment, more savings is better.
Much has been made of the low savings rate of Americans in the past couple of years. A 1993 survey assessed whether Americans of a certain age could obtain $3000 in a few days without borrowing. For baby boomers, the number was 50%. For younger people, the ratio was even less.
When a group of 35- to 49-year-olds were asked if they could come up with three thousand dollars in a few days without borrowing or using a credit card, 49 percent said they could and 49 percent said they couldn’t. Not surprisingly a smaller percentage (only 29 percent) of the 18- to 24-year-olds had the three thousand dollars.
Fifteen years later, the answer to this question is even sadder, though I don’t have a readily available source to document it. Readers, how do you answer this question? What if the amount is $5000? If you can’t answer positively to either amount, you have no business buying a house…especially in today’s market.
Money in such a fund should be liquid, but not susceptible to loss like a stock or other investment account. For smaller funded accounts, I suggest the EmigrantDirect high yield savings account which has no minimum deposit for maximum payout. If you’re investing funds over $10,000, I recommend shopping around as other funds can beat the Prime rate with larger deposits.
No amount of preparation can fully insulate any individual from truly catastrophic events, but having the minimum safeguards in place can certainly stave off a lot of fairly common economic downturns. Downturn doesn’t equate devastation if you’re prepared.
As I assess loans on a day to day basis, the existence of an “oh crap” and emergency fund enter my evaluations of individual borrowers. Lack of either contingency fund indicates to me a level of financial exposure that is simply intolerable, especially in today’s markets.
Dave Ramsey calls it baby steps for a reason.