Emergency Fund Malfunction

Every good personal finance expert will tell you that the first thing you need to do when trying to get out of debt is build a basic emergency fund, typically $1,000.  So, a few months ago, I went and created a new ING Direct sub-account called "Emergency", and set it to automatically transfer $100 every other week from my checking account, to align with when my pay comes in.  As of last week, I was up to $800--almost done with the initial emergency fund goal.

But then, something went terribly wrong.

Despite the fact that I believe we have gone to great lengths to get our spending under control, including making many cutbacks in many areas, our expenses are still not significantly lower than our income.  In some months, we pretty much broke even.  In other months, we still spent more than our income.  The reason for this is that prior to the cutbacks, we must have been spending so much more than our income, growing and growing our debt load, that even with significant expense trimming, we're still not in a great position.

This month, a few unexpected expenses came up, and a week and a half from my next pay day, I found myself in a position where I could not pay a couple of bills without withdrawing cash from my credit card.  So between the option of doing that, and withdrawing from my emergency fund, I chose the emergency fund.  How much did I take from it?  Half.  Yes, the bill is now paid, but I am back to just $400 in the emergency fund.

Talk about an emergency fund malfunction!

Was this the right thing to do?  When you're piled under so much debt and fighting just to survive, there are very few "right" options.  Ultimately, the right thing to do is to cut spending further, and raise income as well, to the point where all expenses can be covered without looking for other options.  But when you are in extreme debt, it takes longer to make enough changes to spend less than you make, unless you are willing to do something drastic like sell your home, which I am not willing to do, at least not unless I have absolutely no other choice.

When you are in extreme debt, cutting your spending may take several rounds of changes, and even then, there is only so much you can cut.  On the flip side, adding income sources also takes time.  Whether you are starting an on-line business, or getting a part-time job, the new income flows are not instantaneous.

Until your spending is well enough under your income to account for budgeting flaws, you are left with few options when that bill is staring you in the face.  Sacrificing your emergency fund is like throwing your life vest overboard when you have no idea if a storm is approaching.  Here's to hoping for clear sailing ahead.