Is An Emergency Fund a Psychological Negative?

MundisI was recently reading How to Get Out of Debt, Stay Out of Debt and Live Prosperously by Jerrod Mundis, an interesting book that sorely needs an updated edition (it was originally published in 1988 – I’d happily review an updated edition), but has at least a good handful of interesting concepts inside.

One comment that really intrigued me was Mundis’ rather negative take on the idea of emergency funds. On page 217 of the paperback edition I have, he writes:

Saving money for a rainy day is a bad idea.

Surprised? Many of us were taught early on that we’d better sock money away toward catastrophe or for our old age. But that kind of “saving” has destructive consequences. It builds a poverty mentality. It tells you that there’s not much now, and that there will be even less in the future. Or that while things may look fine today, you’d better be careful, you never know when disaster will strike. Don’t be a grasshopper singing in the sunlight, we’re told, be a busy ant storing up for the lean times ahead.

People who put all of their money away toward catastrophe live in an increasing fear of catastrophe. That very fear is likely to create such an event – just as a driver who’s nervous and apprehensive about an accident is more likely to cause one than is a confident and relaxed driver who’s enjoying his trip. […] Whatever the outcome, hoarding leads to a sense of restriction, privation, and the idea that there is never enough.

When I first read this, I thought it was utter nonsense. I generally feel better and more confident when I have adequate retirement savings and a nice, fat emergency fund. I sleep better at night, feel more confident about my day to day life, and actually feel the opposite of what Mundis describes in this passage.

One of my closest friends is an intense saver of his money, only spending a significant amount on gifts for others. Yet, for him, I don’t think it’s a psychological negative, either. He’s just a realist about what his needs are and knows that the money will likely be better used at another stage in his life.

As I reflected on it further, though, I realized Mundis may in fact have a point. What Mundis is actually talking about is the hoarding mentality. Much like people who keep as much stuff as they possibly can, eventually to their own detriment because they can no longer find what they need in all of the stuff they’ve hoarded, there are people who do the same thing with money.

I’ve never had this problem, nor have most people who struggle with debt. Right now, I’m spending far less than I earn, but I do it looking forward to a future where I will spend it in some fashion. I intend to someday build a house in the country with some wooded space and a giant garden. I want to be able to stop working when I’m fairly young and get heavily involved in local politics and volunteer work. My motivation to save and save right now is to give me security in the short term and enable these dreams in the long term.

If this doesn’t sound like you – if you instead feel more nervous the more you have saved because you imagine bigger and bigger disasters – I suggest addressing that condition as a separate problem. It’s not your savings, it’s the way you perceive those savings.

Does an emergency fund “draw” negative experiences? From my experience, it’s actually the opposite – it prevents bad experiences. It only creates bad experiences if the foundation is already in place to make that happen – if you’re predisposed to hoard, for example, or you already believe you’re destined for bad things.

In short, financial stability is a good thing in that it frees up your choices. If you’re saving money in anticipation of ever-worse disasters, that may in fact be a psychological concern, not a need to save more money.

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