The Wealthy Barber Returns: Significantly Older and Marginally Wiser, Dave Chilton Offers His Unique Perspectives on the World of Money by David Chilton

Author:David Chilton
Language: eng
Format: epub, pdf
ISBN: 9780968394793
Publisher: Financial Awareness Corporation

Emergency Fun(ds)

MANY IDEAS IN THE WORLD of personal finance sound great in theory and appear to be logical and well thought through in books, but seldom work in real life.

Exhibit one: emergency funds.

Financial writers love these things. And for good reason. We live in unsettled and unpredictable economic times. Bad things happen. What idiot wouldn’t recommend saving at least six to nine months of after-tax income to carry us through rough patches?

This idiot.

Why? Because for 30 years I’ve watched people, even disciplined people, expand the definition of “emergency” whenever they see something they really, really want and they have the money in the bank to buy it.

Few emergency funds stand a chance against society’s innate skill: the ability to rationalize. We can convince ourselves of anything if the result is short-term gratification. It can’t be a coincidence that “rationalize” sounds like “rational lies,” can it? All too often, I’ve seen the situation that follows (and worse!) played out in real life:

EMERGENCY-FUND USE RATIONALIZED EMERGENCY TRUTH

Trip to Cancun “Mike’s been so stressed at work, he needs this escape. It will rejuvenate him. He’ll come back recharged and ready to go. Yes, it’s expensive, but what price health?” Mike wants to party.

Hot tub “I really believe this will save us money. We’ll spend more time at home and we won’t ever need a pool. Plus, Mike loves having our friends and neighbours over. I mean, what price happiness?” Mike wants to party.

Finished basement “The kids are driving us nuts. Our living room is like a drop-in centre. We need a place to call our own and host friends. Yeah, it is a little more than we budgeted, but what price friendship?” You guessed it — for a good time, call Mike.

Look, I have no problem with Mike personally. In fact, I wish he lived next door. I do have a problem with his financial plan, though.

Book after book has told Canadians that accumulating several months’ worth of income should be our top savings priority. Only when that’s accomplished should we move on to RR SPs and other vehicles that can help us reach our long-term goals.

The issue is that the vast majority of people never hit their target of six-to nine-months’ income before the funds are diverted to a not-so-emergency emergency. They “go all Mike” on us and have to start the process over again. And again. And again.

Meanwhile, their RRSPs sit in perpetual waiting.

Frankly, my own advice in The Wealthy Barber was probably even worse than the conventional wisdom I’m criticizing. I argued that instead of saving to have an emergency fund available, people should just set up a line of credit for the appropriate amount. That way they could direct their savings to more productive areas than low-interest, fully taxable investments and avoid the temptation of a swelling bank account.

Whoops. We’ve now seen how most of us manage our lines of credit.

It’s funny, but even after all these years of studying people’s financial plans, I’m still not at all sure how best to deal with emergency funds.

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