Monday, August 4, 2008

Be Prepared: Emergency Fund

Many folks may cringe at this post and say how the hell can I do that when I am just scraping by. Let me preface this by saying this is not a "cash on hand" or doomsday fund. The Emergency Fund I am writing about for this post is the "Everyday Emergency Fund"...you know the my car broke down, I broke my arm or I lost my job type fund.

This fund needs to be liquid but tough enough to get to keep you from dipping into it unnecessarily. For our purposes we selected to place the money with ING Direct in one of their Orange Savings Accounts. The interest rate is much higher than a regular savings account and it takes a day or two for the money to transfer back and forth between ING and our checking account (giving us "buyer's remorse" time if you will).

Many experts say you should have between 3 and 6 months months worth of total living expenses in your Emergency Fund. I like the 6 months number...it gives you some cushion. How do I figure out how much I need? Well take all your monthly bills and add them up, if for example they came out to $2,500.00 then multiply that by 3 for ($7,500.00) or 6 for ($15,000.00).

I can see the comments already..."ARE YOU NUTS!!! How the hell am I suppossed to do that?" Listen, no one says you immediately start with that amount. You start with whatever you can afford even if it is only $100. Just make sure whatever contributions you make are automatic so they go in every month, week or whatever. Automatic is good because after awhile you don't even miss the money...you get used to it not being there. My wife and I started with $100 a month or roughly $25 a week. Over a few years we have our Emergency Fund fully funded. Now if you have an actual emergency by all means dip into your fund that is what it is for. Buying a Wii or a new TV is not considered and emergency though...just to be clear.

If you can try and find something you can cut out and take those funds and use them to fund your Emergency Fund. I worked a second job for a while to help contribute to our fund...do whatever you can. Have a garage sale and get rid of some of the crap cluttering up your life and put that in your Emergency Fund...hell collect aluminum cans if that is what it takes...just do something. (My wife and I save all our aluminum cans to sell to the scrapyard...it takes awhile to build up a good pile...but we have the word out so friends and relatives save their cans for us.)

Having an Emergency Fund can really help you in a pinch...especially in the case of job loss. Make sure to start one today...no amount is to meager. The point is if you NEVER start you will NEVER have that money grow through the beauty of compound interest. Take into consideration your loved ones and make sure to find a way to get started today save some money.

...that is all.

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6 comments:

  1. ARE YOU NUTS!

    Good idea but I would keep it in a coffee can...don't trust banks. In an emergency the fed will impose order by simply shutting off the money networks.

    Very sound advise otherwise.

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  2. Many people have an aversion to banks and that is fine. Everyone must do what they are comfortable with. Just make sure if you keep the money somewhere it is safe from theft and fire.

    Always have cash on hand for emergencies as well. I have a stash that is "safe" and will be available to me in the event of an emergency...

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  3. Also you may add a electrical light switch modify it a bit into a wall to had a money roll in as well! Just use the box glue the flip switch in giving you a excellent hiding location in plain site!

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  4. While I've always understood the importance of putting money aside, I never came across the formula for saving the proper amount. So thanks for that tidbit.

    Contrary to what most of these posters are saying, I like to keep the majority of my money in a bank. The FDIC insures amounts up to $100,000. Most of customers at the failed IndyMac bank got their money back with the help of the FDIC.

    This doesn't mean I don't keep a stash of cash in my house. But the lions share is kept in a bank where it is insured and protected against flooding and house fires.

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  5. If you are going to hide money a better choice would be a fake wall outlet with a heavy piece of furniture in front of it.

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  6. Flea,

    I came across your blog courtesy of Mr. Rawles.

    One thing I would add to your preparation of an emergency fund is ALWAYS take the time to go through your pocket change.

    I am still finding clad or 90% coins in the change as buy stuff using cash.

    I put the clad in one container, and the 90% in another container. The stuff is worth more than the face value as silver continues its upward climb.

    If the economy recovers, and silver drops, one hasn't lost anything. However, if things continue to get worse, you may have added a valuable hedge.

    ReplyDelete