Here’s a hypothetical: Finances are tight but your cell phone is broken. You call your service provider and they tell you, “Oh yeah, that phone is known for always breaking. But good news! It’s under warranty so we’ll send you a new one for free.”

Assume for purposes of this exercise that your livelihood does not require a reliable cell phone. Do you respond:
(A) “Great – send it ASAP!” or
(B) “Gosh, I can’t live with an unreliable cell phone for even a minute even if I only use it socially. Let me spend money on a new one instead.”

Not surprisingly, I would choose (A), especially if each new phone came with its own (new) warranty, so that if the new phone broke, I’d simply get yet another replacement for free. Obviously, it would be a hassle, but if money is truly tight, I can live without my phone for a few days. And I might not have to, since I could (probably) get a replacement at my service provider’s store.

Do you know anyone who would choose (B)? I do.

And I just don’t get it. I mean, I understand that a cell phone is important, but if I’m worried about being able to pay my bills, I’m not choosing to spend money on a new cell phone when I don’t have to.

When I was reflecting on my friend’s choice, I realized that it all comes down to priorities. And some people value other things over financial security, stability and independence. It may be status, or it may be safety. It may simply be denial – a sense of “I’m worth it, no matter what my true financial state.”

Since it’s a new year, when people traditionally establish goals for the next twelve months, I ask you:

Is financial security truly a priority? And if so, do you act in accordance with that priority?

More than 200,000 California state employees are now working for federal minimum wage, or $6.55 per hour.* And they’re the lucky ones. Part-time and seasonal workers were fired.

All because the state legislature can’t pass a budget, even though the last fiscal year ended on June 30. (And because Governor Arnold Schwarzenegger apparently doesn’t care if California ever has another Republican governor. He signed the executive order bringing about this situation.)

Sure, the employees now receiving minimum wage will eventually be reimbursed the difference in their salaries. And the part-time and seasonal workers will probably get rehired.

But in the meantime, how many employees have an emergency fund that will see them through to the passing of a budget? I have no idea, but I can guarantee that not everyone does.

Where does that leave them? The Sacramento Bee State Worker blog reports that Golden 1 Credit Union will offer interest-free or low-interest loans to state employees. An interest-free loan sounds pretty good, but it’s only available to members who had direct deposit set up before June 30. The low-interest loan at 4.99% is available only to members who joined before June 30 and signed up for direct deposit after June 30. All other employees must turn elsewhere for higher-interest loans.

That’s a hefty penalty for an innocent state worker to pay. But just how innocent is the employee who doesn’t have an emergency fund?

After all, an emergency can strike at any time, whether it’s a catastrophic illness or your employer refusing to pay you what they owe. We all have an obligation to ourselves and to our loved ones to be prepared for such events to the best of our ability. It may be too late for California’s state employees to build their emergency funds up before they need them, but their predicament should serve as a reminder to all us of to make sure that we are financially prepared for an emergency.**

*The state minimum wage is $8.00 per hour. (source)

**It’s possible state employees will never miss a penny from their paychecks. State Controller, John Chiang, who issues the checks, has indicated that he will not comply with the governor’s executive order. So if a budget is passed before the state runs out of money, all should be well. And this will all just have been a lesson learned. Until next year, when the legislature fails to pass the new budget in a timely manner . . .

I’ve said that my best financial decision of 2007 was the creation of an Infrequent Bills Account (“IBA”), which is what I use to pay annual and semi-annual bills. To determine how much to contribute to this account each month, I added up the annual amount of each of the applicable bills and divided by twelve. Each month, I take that amount and transfer it to the IBA. If necessary, I first deduct the amount of the bill I will be paying that month.

I had forgotten that June is when four of our life insurance premiums hit. Added together, they account for the entire month’s IBA contribution. In fact, I’ll be taking some money out of the IBA to pay for May’s car insurance bill, which I had charged to our credit card and will be paying off in June. Because of the IBA, these bills are all taken of without any stress.

Some people treat their emergency fund as untouchable except in true emergencies, such as a job loss, while others consider their emergency fund their primary savings account, to be tapped for unscheduled, unbudgeted expenses. I fall into the latter group, and I am expecting to have to tap our emergency fund in June for a couple of reasons.

First, due to a lack of foresight on my part, I allowed Alex to put a small dent into a car that was parked next to us. The owner of the car insisted on exchanging insurance information, so although I think it may hurt him in the long run to file a claim on the dent, he may very well do so. I’m just glad that I don’t have to worry about where the money to pay for this claim will come from (although it may very well be covered by our insurance policy, which in turn might cause our premiums to rise).

Second, like PaidTwice,* we have some unplanned medical bills coming up (nothing to worry about, though). Like PaidTwice, the amount left in our Flexible Spending Account probably won’t cover the bills in their entirety. Again, I’m grateful that we have a solid emergency fund in place so that I don’t have to worry about how we’ll pay these bills.

The funny thing is, at the same time that I’m grateful we have the money set aside, I’m still a little frustrated that these unexpected expenses are setting us back in our quest to achieve our financial goals!

*If you don’t know I’ve Paid for This Twice Already, I highly recommend checking it out. PaidTwice writes openly about her family’s debt and how she’s paying it off. Her budget accounts for every incoming penny, and she shares the real numbers each week on Tell All Tuesday. I really enjoy her frankness and accessible style of writing, and I think you will too.