A second emergency fund you never spend?

Photo: Philip Brewer

I ran across this idea in a book by some financial guru years ago. The book was packed with an odd mix of obvious and kooky ideas, of which this was one of the latter. For some reason, though, this kooky idea has stuck with me: Have an extra emergency fund with money that you'll never spend, even in an emergency.

A second emergency fund provides a two advantages, both primarily psychological.

First, there's a psychological effect on yourself that comes from knowing that you're not broke. No matter how bad things get, you've got a few hundred--maybe a couple thousand--dollars that you could put your hands on in a day, if you had to.

Second, there's the psychological effect on others that comes from being able to see that you're not broke. There are whole categories of con games that use "show money" as part of the scam, to make the con man seem trustworthy--or at least not too desperate for money. The point here is simply to use the same psychology that works for scammers.

For this to work--and the book emphasized this at some length--you never spend the money. You don't spend it to keep your health insurance, to keep your car from being repossessed, or to keep the electricity on. You don't spend it to keep from being evicted. (Which is worse--being out on the street broke, or being out on the street a month earlier with $1000 in the bank?) And, as long as you never spend it, you're never broke. You might not be living any better than someone who's broke, but you're not broke.

As I say, it's a kooky idea, but it's a kooky idea that has stuck with me.

For this particular purpose, I think savings bonds might be a uniquely appropriate vehicle. For one thing, savings bonds give you a handsome piece of paper that looks like it has some value, but that you can't just spend--you have to take it to a bank first and cash it in. The prepayment penalties on savings bonds are quite small, but are more than zero, which gives you an excuse for not wanting to tap the savings bonds, in situations where you are using them as "show money."

Would I do this? I don't know. I suspect, like most people, I'd be too optimistic. I'd go ahead and keep the power on, keep the sheriff from the door, hoping that one more month would be enough time to turn things around. If this idea works at all, I think it's not the psychological effects of having a little cash, but rather by helping you abandon a losing strategy before you're too far under. If you're not going to find work, then maybe you need to do something more drastic: Move back home with your parents, or into your brother-in-law's basement. Move to a bigger city, or out to the country. Those are hard measures to take, but if you have to take them, then sooner is probably better than later. This might help you take them sooner. But it's still a kooky idea.

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Guest's picture

Refusing to spend money even while your life crumbles around you is the epitome of stinginess. Haven't we all heard stories of some miser or other who lives in squalor and dies with hundreds of thousands, if not millions, in the bank? Money should be a means to an end--a happier life--and not an end in itself.

Guest's picture

This does not make any sense at all. Why have money if you never spend it, even when you need to? If you really think you need a 2nd emergency fund, it should be in some hard assets like gold or silver coins. Then, in the event of a disaster, or if we see massive devaluation of the dollar like they did in Argentina, you will be safe.

Savings bonds are a poor long-term investment, except for maybe i-bonds.

Guest's picture

I don't think I could personally handle this. I'd be more prone to safely invest in a liquid account. This would give me the ease I would need in knowing it's a smarter alternative. I think it depends on your personality and temperament. I know a couple who just bought a new house a little beyond their needs. They do have some debt and yet keep up their lifestyle. They have one of these 2nd emergency funds. It gives her peace of mind, knowing that even if they're in the hole they still have some money, even though they would never touch it. From what I've observed of them, it seems having this stash has also encouraged them to spend more. Because they know they could cover the debts/expenses if they really needed to but for the time being just making minimum payments. It's a two-edged sword for them.

Guest's picture

The IRS or the Bankruptcy Court can get their hands on your second or third or fourth emergency fund. I think to be honest it is kind of pathetic to be so scared of being desperately poor that you have to save up for when the rainy day has a rainy day. "Look at the birds of the air...and the flowers of the field. Are you not much more important to your Father in heaven." Money cannot provide security ultimately. Only God can.

Guest's picture
Debbie M

Another psychological advantage is that you can tell yourself that your life mustn't be that bad yet because you still haven't spent your money.

I'm not sure it would help for those desperate situations where it seems like throwing money at the problem would help, but it only puts off the inevitable. People will try so many things that won't help long-term them before they realize that they need more desperate measures. Like you said, before moving, people will use up all their savings, all their investments, borrow money from their retirement fund, and borrow money from all their friends. Only when all those avenues close will some people start looking for a long-term solution.

On the other hand, maybe people will think of taking that kind of money as failing in a way that they just wouldn't think about the other things I mentioned. And so maybe they would switch to long-term solutions more quickly.

Guest's picture

First, I love how Philip is constantly looking at the psychology and philosophy of personal finance and wealth. I think it is very imprtant to keep thinking about how we view money and wealth, and to look for ideas like this. This is why his posts kick ass.

Second, this idea is somewhat like having a nuclear weapon. Presumably, you'd only use it as foreign troops were sailing up the Potomac. OK, this sets off political discussions and even discussions of WWII, but you know what I mean.

Philip Brewer's picture

Thanks, everyone, for the good comments.

I agree that the kind of fear that prompts someone to save in case "the rainy day has a rainy day" is sad and shouldn't be encouraged. (A great line, by the way!)

On the other hand, I'm not sure this qualifies as "stingy" behavior. If your lifestyle is unsustainable (for whatever reason) then it makes no sense to go on throwing money at it, merely to keep it going for another month or two. Far better to find a lifestyle that works for you--and making those changes is a lot easier with some money in the bank than it is after you're already broke.

Guest's picture

If you have an IRA or 401K or 403A/B account, it can serve this purpose very well, at least until you retire. You really *should not* remove money from these before-tax accounts, as the penalty is severe. But you can look at it and say "hey, I'm not broke". Of course, once you retire, you'll start tapping it. So it's not quite the same thing. But for the psychology, it's good, I think. At least, it's worked for me. "I have debts, but when I add in my retirement fund, I have a positive net worth!"

Myscha Theriault's picture

I too think it's important for Philip to keep up the good work covering the pychology of money. It's clearly an emotional issue, which is why so many of us here at Wise Bread continue to receive emotional comments on various posts (not a bad thing, just an observation). I think the more information we have to reflect upon why we are or are not making a particular financial decision only helps us in the long run as we try to control our money rather than the other way around. If the pyschological benefits of having a second stash are worth it for you, go for it. If not, spend / save / invest as you see fit.

Provacative post as usual, Philip. Rock on!

Guest's picture

I think this makes more sense (at least to my spending habits) in the reverse. As in, have a second so you *will* spend the first.

I take no credit, this was detailed in comment #6 on a previous post

Because 'My car got rear-ended and needs body work' and 'My child's been diagnosed with cancer' are both emergencies, but I would always feel uncomfortable digging in for the first for fear of the second.

Practically, it's almost the same thing, since odds are darned low a real earth shattering variety emergency will ever happen (particularly right after a minor one). So in practice, the first emergency fund doesn't get tapped - but you don't exactly *plan* to never tap it.

Guest's picture

This is an interesting idea. I, however, wouldn't keep the 2nd emergency fund intact at the expense of my credit, for example, because that could impair my future ability to acquire more money or get back on my feet.

So allowing myself to be evicted or default on several credit cards would not be ok to me.

Guest's picture

I sort of have one of these in the form of my retirement funds. I'm not even sure I'm allowed to touch them (I'm in the UK btw). I never think of them as emergency funds, but I guess they would represent hope - that its not always going to be this bad.

The very worst time to be thinking of using a nuclear weapon is probably as you are being invaded. If you bomb the invading army that will destroy your own civilians. If you bomb the other armies cities, that's pretty likely to annoy them and make them covet your land even more.

Guest's picture

I've never used anything from my 1st emergency fund so I don't think a 2nd one is necessary. I guess if something extreme happens, I can raid the non-retirement portion of my investment portfolio.

Guest's picture

I've heard these MLM/Prosperity guys actually do it even more simply. They always keep a $100 bill in their wallet that they never spend. That way, they're never broke, but it's cheaper than $1000. They say it gives a big psychological boost.

Guest's picture

I have used the 2nd 'emergency' fund in the past when I needed to change my spending habits. When I was laid off from my job in 2002, I handed over my primary emergency fund to my father so I would not spend it. I just didn't trust myself. In essence, this became my second emergency fund. If I had to touch it (aka asking my father for help--even though it was really my money), then it was a sign that the situation was dire.

I learned to live and to save off of unemployment. Even though I knew I had a 2nd emergency fund waiting, I still felt the pressure to create a new primary emergency fund. I actually learned to shed a lot of unnecessary spending habits and save a little as well.

When I found a new job, I lumped the 2nd 'emergency' fund into my primary emergency fund. I live well below my means now. I think I am better for having done things this way, but everyone is different.

Of course, now I may have really swung in a different direction. I fully contribute to my 401k and Roth IRA and have an emergency fund that is 70% of my gross income. I don't know if this is a problem, but I don't consider myself miserly as I enjoy a lot in life.