Have you ever heard the saying, “cash flow is king?” Probably, not. You’ve likely heard that “cash is king.” Cash flow is all about liquidity…ie having the means to cover the expected and more importantly…the unexpected.
The emergency fund is the foundation of personal finance.
The Emergency Fund is the Foundation of Personal Finance
Cash flow is the hallmark of personal finance. It gives us the ability to save, pay bills, invest, plan, and just about everything else related to money coming in and going out. Having a great emergency fund stashed away can come to the rescue when the unexpected arises.
Over the years I’ve learned that getting over the personal finance hump begins with careful calculated planning. It’s really all about great cash flow management. Simply, if you don’t have access to liquid funds when the unexpected comes, you are at great risk.
You need to have a strong foundation and that’s why the emergency fund is the foundation of personal finance.
Below, I created a personal finance pyramid showing that the foundation in personal finance (retirement) success is filling up your emergency fund. Some people are okay with just 3 months of expenses saved, but I suggest 6 months. This may be the most important layer in the personal finance plan.
Take the Stairs Up and the Elevator Down
On Wall Street there is a saying that goes, “take the stairs up and the elevator down.” It highlights how gains in a stock investment can take months or even years to accumulate, only to get wiped out in days or weeks. For many, the key to investing in the stock market is managing risk. The same can be said for personal finance.
Setting up your emergency fund can take a long time…it takes sacrifice. Planning for 6 months of saving instead of 3 months (while not easy for many) can make a huge difference if the need for cash is large enough.
Now, setbacks are to be expected, however when disaster strikes you want be prepared. This is why I believe that having at least 6 months of expenses saved is the first plan of action. You want to make sure that the slow steps up, have a strong foundation.
No matter what your situation is, unplanned big expenses can hit at any moment and usually will without notice. A loved one could get sick, your car could break down, the A/C may blow it’s last gasp…to quote Murphy’s law, “whatever can go wrong, will go wrong.” The emergency fund is there for what “…will go wrong.”