Issue VI | Why Your Money Needs a Seatbelt Too

This is one of my favorite statistics of all time: “65% of Americans believe they are above average in intelligence…”

A little odd, isn’t it? I feel conflicted myself considering I would have fallen in that same 65% group had I been in that study… I think it’s mostly a result of human nature. More often than not, we give ourselves more credit that we probably deserve.

I don’t mean this in a negative way, either. It’s just a fact (a generous usage of that term) of how we are wired. Maybe less a fact and more a statistical trend. Regardless, this overestimation of ourselves extends further than our self-perceived intelligence.

A distinct example of this overestimation can be seen in adolescents. Adolescents are prone to what is called “adolescent egocentrism,” which is the cognitive stage where teenagers experience an exaggerated sense of self-importance and a skewed view of risks and consequences among other things. A particular behavior that comes from this is dangerous driving habits, such as speeding and driving without a seatbelt, because “that would never happen to me.”

I was one of those adolescents. I often drove without a seatbelt because I thought that because I was behind the wheel, I was in control. I trusted myself. What I failed to fully consider was that there are a ton of other people behind wheels on the road too. Did I really trust those people with my life too? My actions said so.

Don’t get me wrong, you can drive without one and much more often than not, you will get to where you’re needing to go without harm. However, there will come a time when you get behind the wheel, something goes wrong, and your seatbelt wasn’t there to save you. Whether it’s your fault or not, there is something that is coming your way that you need to be ready for.

That is what an emergency fund is for. Your emergency fund is a seatbelt for your financial life. When you lose your job unexpectedly in a market downturn, or get hit with a big medical bill, or need to stop working to take care of serious life matters for an extended period of time, you need a stash of cash to keep you from getting ragdolled.

Aside from saving your financial life, a proper emergency fund also gives you peace of mind. You don’t need to live life worrying about the next unexpected event. You can smooth out life’s bumps and avoid making desperate decisions that are only going to make things worse if you get out on the other side.

So how much of an emergency fund do you need? Essentially, there are 2 levels: