James d. Gwartney

Video:
The Sharing Economy
You can choose among the frugal strategies in order to be able to afford other things
you might want to spend money on, or you can subscribe to many of them. The important
thing to realize is that you have many more choices than thoughtlessly buying new things.

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Plan for the Unexpected
We have talked about the value of saving for your future. But you also need savings for
emergencies. Life has an endless string of surprise occurrences: the car breaks down, the roof
leaks, a drought withers your crops, your child breaks an arm—just to name a few.
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We
can’t predict which ones will occur, or when. But we can predict that over any long period of
time, each household will confront such costly items. Thus, it makes sense to plan for them.
This is what your emergency savings account is for. It will help you deal with unexpected bills
that could otherwise put you under severe emotional stress and into a financial bind.
The alternative is to wait until the surprise events occur and then try to devise a plan to
deal with them. This often means running up credit card balances or some other method of
borrowing funds on highly unfavorable terms. Then you have to figure out how you’re going to
cover the interest charges and eventually repay the funds. At other times it might mean turning
ELEMENT 4.6
Begin paying into a savings account for emergencies (a “rainy day” or “black day” fund)
every month.

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to your family and neighbors who have had the foresight to assemble their own emergency
funds. All of this leads to anxiety that is likely to result in unwise financial decisions.
How much should you set aside regularly to deal with such events? One approach
would be to make a list of the various surprises you and your relatives and neighbors faced in
the past year and estimate how much each one cost. Think about car repairs, unexpected travel,
doctor’s visits, a home appliance replaced—anything that was not expected to happen last year.
Add the costs up, divide that number by twelve, and begin channeling that amount monthly
into your rainy day savings account.
You might even want to pay somewhat more than the average needs into the account
just in case you have unusually bad luck in the future. After all, if you pay too much into the
account, you can build up a little cushion. If the funds in the account continue to grow,
eventually you can use some of them for other purposes or allocate them into your retirement
savings program. The key point is to consider the monthly allocations into your savings
account as a mandatory rather than an optional budget item. Thus, they should be treated just
like your mortgage payment, electric bill, and other regular expenditures.
A savings account set aside for emergencies allows you to purchase a little peace of
mind rather than worrying about the financial bumps of life. With such an account, you will be
able to deal confidently with expenditures that, while unpredictable as to timing, can
nonetheless be anticipated with a fair degree of accuracy. During periods when your surprise
expenditures are below average, the balance in your account will grow. When the surprise
expenditures are atypically large, the funds in your account will be drawn down, but you can
remain calm because you are prepared. This is an important element of what it means for you
to “take charge of your money” rather than allowing “money to take charge of you.”

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