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.