Finance and Fat » Emergency fund

Getting started on our 2008 emergency fund goal

Eden — Sat, 05 Jan 2008 16:00:35 +0000

I didn’t mention it before, but I got a raise at my day job about 2 months ago. It wasn’t huge, about 7%, but I’ll certainly take it. By the way, I started by asking for 15% so either money is really tight at work or I’m being phased out.

Anyway, the point is that I made no plans of what to do with the extra money except to ‘pay it toward debt’. I’m pretty good about sending all excess money each month toward debt payments, but I also want to protect myself against spending inflation thanks to my now higher earnings so today I set up an auto-withdrawal to my long term emergency fund account. I left a little extra on my new ‘take-home’ pay (what gets deposited in my primary checking account) and sent $120 to my emergency fund. That will put us very close to the new emergency fund goal by the end of the year and as I also hope to have the credit cards killed off later this year so I will be able to finish funding the account then.

You’ve heard it before, but I’ll say it again, paying yourself first is always a good thing. If you find yourself fortunate enough to see an increase in earnings this year take the time to actually DO something with the extra money rather than just giving it a general purpose or category in your head. Directing it to another account immediately will allow you to easily continue your lifestyle and start saving for something important.

Getting started on our 2008 emergency fund goal

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Get Out of Debt in 9 Steps # 4 – Create an Emergency Fund

Eden — Thu, 22 Nov 2007 10:01:57 +0000

The personal savings rate in the U.S. is currently under 1%. Not quite negative territory as we often hear in the media (it was actually only negative for one quarter in 2005), but 1% is clearly not enough. Personally, I never had much more than $100 in a savings account until I started my financial turnaround and saved my basic $1,000 emergency fund. I do have small retirement savings as well, but if I were to look back at the money I have earned in my life versus how much I have now, it’s quite easy to see that my savings rate is less than 1%. We can’t allow this to continue!

If we know that the national savings rate is under 1%, odds are good that you too have very little cash saved for emergencies. Basically, that makes you ‘normal’, but to get out of debt we need to break away from the ‘normal’ American lifestyle.

If you haven’t saved any money yet, saving $1,000 probably seems like a daunting task. It did for me, but once I committed to saving the money it didn’t take very long at all. I started by setting aside $250 and opening an ING Direct Orange Checking account. I started with $250 because I had referral code that earned me a $25 bonus and my referrer received $10 (be sure to ask your friends if they have an ING account and a referral). I like the Orange Checking account because the interest rate is decent and you can use the debit card to handle your emergencies. ING has a very nice online interface as well and I am happy with my choice. You shouldn’t spend too much time worrying about the interest rate on your emergency fund though, you will find that rates vary a lot with the online banks and we aren’t talking about a lot of money in this account (at least not at the start) so just creating an account that you can easily access when you need it is the key.

How much should you save?

Starting with $1,000 is an arbitrary choice, really just a nice round number that will cover most normal emergencies. The rule of thumb is to eventually save 3 – 6 months of living expenses, but that isn’t very realistic for someone just getting started. I will be working on increasing my emergency savings more quickly once my credit card debt is paid off, but until that is done, I’m willing to live with only $1,000.

Ultimately, the amount of your emergency fund needs to be what you are comfortable with. What allows you to sleep well at night? You may need one year of living expenses available in cash. It is entirely up to you, there is nothing wrong with having cash. As your emergency savings grows to larger levels you could safely look at putting some of it to work in CDs or Treasury Bills to earn a little more interest if you wish, but you aren’t going to get much more than a good money market fund if you want to keep your money safe and liquid- which it must be if it is an ‘emergency’ fund. Remember, this money is not an investment, it’s a safety net that will allow you to pay the bills if things take an ugly turn in your life. Just think about how you would feel if you lost your job tomorrow. Then think about how you would feel if you lost your job tomorrow and you had $30,000 in the bank. That money really changes everything- you wouldn’t have to rush out and look for a job or take a job that you don’t want just to survive.

It is true that you could have some of your emergency fund invested in mutual funds and most of the time you will earn a far better return on your money. The problem is, you will be at the mercy of the stock market. If your emergency hits when the market is at an all-time low, that $30,000 might only be worth $15,000. You have to decide how much risk you are willing to take, but I strongly advise treating this money as strictly reserved for emergencies and not invested in anything that can go down in value. You will have other dollars to invest so don’t feel like you have to have every dollar in high-yield investments. Remember, it is okay to have cash!

Next up in the series I will cover Living Below Your Means.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 4 – Create an Emergency Fund

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Savings Tip- Charge Yourself Exorbitant Bank Fees

Eden — Sun, 18 Nov 2007 23:01:43 +0000

If my bank charged me a 10% fee to transfer money between accounts, I would promptly be seeking a new bank. However, if those fees were being paid to me, it would help my savings to build up over time. That is the premise behind my simple idea to help increase my emergency fund.

We have all heard the advice ‘pay yourself first’ and I do that, but I am intentionally keeping my savings rate low while I work to get out of debt. I started a basic emergency fund with $1,000 and I set up an auto transfer of $25 each month to slowly build that up.

It seems that starting an emergency fund is all you have to do to start creating financial emergencies in your life! Only a couple of months after making the fund I have accumulated nearly $1,000 in ‘emergency’ type unexpected expenses. I have put back all of the money I have used from the account, but when I have to tap into that $1,000 balance it always makes me start to wonder if that is really enough- even while I’m in this debt repayment phase.

To help build the balance a little faster I decided to implement a rule that I would repay any withdrawals from the emergency account plus a flat 10% fee, rounded up to the nearest dollar. It’s unlikely that an extra 10% would negatively effect my budget in any way and it will help to build up a more comfortable cushion of cash. It is also a smart system because it responds to my actual emergency fund needs- if I am making a lot of emergency withdrawals, then it makes sense that I need to be saving more for emergencies. If I rarely touch the account, then it makes sense to keep it low while I am working on getting out of debt. This month, I had to spend $170 from the emergency fund to get our oven fixed, so when I get my paycheck next week I will be transferring $187 back into the account.

This is a simple idea, but it goes along nicely with my philosophy of small steps and slow changes that add up to big progress over time.

Savings Tip- Charge Yourself Exorbitant Bank Fees

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Emergency Fund Going in the Wrong Direction

Eden — Wed, 24 Oct 2007 14:47:15 +0000

October is turning into a difficult month for our emergency fund.

First, we had minor unexpected expenses when my wife came down with a sinus infection- about $50 for prescriptions, a copay, and a few over-the-counter things we had to buy.

Then the big emergency hit- I had to spend $659 for emergency dental work and a prescription.

Now the oven stopped working. Strange problem because the broiler and the range work, but it won’t bake. I can’t figure it out and I don’t want to get too involved with trying to fix a gas appliance on my own so we scheduled a service call for this Saturday. It’s $65 just to get someone to come look at it, so I’m hoping the parts and labor won’t add too much to that.

It looks like we are fast approaching $1,000 worth of emergencies. Thanks to budgeting and doing extra work on the side, I can handle the expenses and refill the emergency fund at the end of the month, but it does mean less money will be going toward debt, which is a little disappointing. This also has me wondering if a $1,000 emergency fund is enough. $1,000 is a rather abstract figure chosen only because it is what Dave Ramsey recommends in his debt snowball program. It’s certainly not my long-term emergency fund plan and not even close to 3 – 6 months of living expenses. I may start bumping it up to $1200 – $1500, but I don’t want to keep cutting my debt payments either. I will see how things progress and maybe start by adding an extra $50 per month on top of the $1,000 base. I hope this is it for emergencies for the rest of the year!

Emergency Fund Going in the Wrong Direction

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Bye Bye Emergency Fund

Eden — Fri, 19 Oct 2007 01:52:00 +0000

It’s not all gone, but I had an unexpected trip to the dentist today that cost $659. That was with a discount! I really wish I could be paying off debt with that money, but I was in a lot of pain and I knew I was going to have to get the dental work done some day. I’m glad I had the money to handle it. Just about any other time in my life I would have been putting that on a credit card.

I didn’t have to pull all of that out of the emergency account and I’ll be able to re-fund it before the end of the month. It just means less money paid on debt. Unfortunate, but that’s life. It felt good to be able to handle the expense with cash. If you don’t have one yet, I highly recommend a basic $1,000 emergency fund as a top priority for getting out of debt.

Bye Bye Emergency Fund

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