I’ve written previously how I think some financial terms we use – for example, “unexpected expenses” – perhaps do more harm than good. In that same vein, I’d like to suggest that we stop using the term “emergency savings.” Instead, we should just use the term “savings.”
Some folks will see this as semantics, and perhaps it is. But, much like the word “unexpected” in “unexpected expenses” is misleading, I think the word “emergency” in “emergency savings” is both misleading and perhaps leads to less than optimal outcomes. Savings, by definition, is money you set aside for possible short-term needs. Lots of folks interpret this as being for an upcoming bill that you know is coming due, or perhaps for an upcoming relatively large purchase that you know you can’t pay for out of your regular cash flow. To me, the former is definitely not savings, as you’ve already spent the money (or at least committed to the liability). It’s more like “delayed payment.” The latter can indeed be thought of savings but, again, it’s designated for a specific future purchase so, in some ways at least, it’s also just delayed payment (or delayed spending if you’d prefer.)
I certainly encourage folks to have money set aside for these, and they often should put that money in a (high yield) “savings” account until they “finish” spending it. But also in that account should be money for those not-so-unexpected expenses that arise. And this is where I feel like the current terminology is perhaps a cognitive barrier for some people. These are not emergencies. These are expected expenses (only the timing is perhaps unexpected) and should be part of your expected long-term cash flow (or, for those who budget, be included in your budget). From my point of view, “emergencies” are things that are both truly unexpected as well as large enough that you can’t pay for it out of current cash flow. If you can pay for it out of savings that you have set aside from your current cash flow, then it’s not an emergency, it’s an expense.
A true “emergency” is something where you have to make some kind of fairly significant adjustments to your lifestyle and/or pull from your long-term investments in order to handle that emergency (think long-term unemployment, or disability, or some major health condition that not only increases your expenses but decreases your ability to earn an income). It may just be semantics for some folks, but to me words matter. And when you label common and expected expenses as “emergencies”, you aren’t doing justice to the word “emergency.” By grouping true emergencies with the normal expenses of living, you are deceiving yourself as to the level of lifestyle that you can afford. It’s very difficult for all but the wealthiest of us to financially “plan” for an “emergency”, but we should all be able to plan for the reasonable and expected expenses associated with our lifestyle.
So, for all of the expected expenses we have, including a bill that we know is coming up, a future purchase we are planning on, or the not-so-unexpected expenses that you can easily envision based on the lifestyle you are choosing to live, let’s call the money we set aside for that “savings.” (Even though I personally don’t view those first two as savings, I’ll allow it.) You should be able to fund (and maintain) those savings using your regular cash flow, the difference between your current income and your current bills. If you can’t, then you are living beyond your means. And I don’t mean that in a judgmental way, but simply as a rational analysis of your current circumstances. There are likely even times when it makes sense to live this way (for example when you are first starting out, or certainly for those making poverty-level wages). But that doesn’t equate to convincing yourself that you aren’t living on the edge and that this is sustainable for a long period of time.
Calling them “emergency savings” is a way (for some folks at least) to deceive themselves about the lifestyle they can afford. Which is why for me it’s not just semantics, it’s a term that actively works against your financial health and well being.
Important Note: I am in no way trying to minimize the impact of these expenses or how stressful it can be when you don’t have the money to cover them. Nor am I speaking to folks who are earning poverty-level wages. But for those not making poverty-level wages, I’d like to to have them think more clearly about the lifestyle they can truly afford and what is really meant by the term “emergency.”
Fisch Financial 