Wednesday, December 8, 2010

10 Things About Your Emergency Fund

My emergency fund has saved me on more than a few occasions. Everything from late checks to car problems to house problems have been quickly remedied because I had the cash on hand to cover the "emergency". Here's ten things I have learned about having an emergency fund:
  1. $1,000 is a good amount to start with for an emergency fund. Although some people say you need six month's worth of living expenses in your emergency fund, when you are digging out of debt, a smaller emergency fund is fine. Let the bulk of your extra money pay down 18% debt instead of parking it in an account earning a paltry 1%.
  2. You can put $1,000 in an emergency fund in fairly short order. When I first heard (from Dave Ramsey) that I needed an emergency fund, I was so deep in debt I thought there was no way I would be able to put that much money aside and not use it. After all, nearly every day I was having a financial emergency (usually of my own making). However, it is amazing what you can do when you are 110% focused on a goal. I CraigsListed stuff, I eBayed stuff, I sold my jewelry, I forced myself to put money into the emergency fund first before paying anything else. In less than a month I had my small emergency fund set. And you can too.
  3. The stars will conspire against you as soon as you get your emergency fund set up. I don't know what the deal is but I have heard this from many people. As soon as they had an emergency fund, emergencies started happening on a regular basis. I remember our furnace went out in the dead of winter ($985), the car's engine started sucking air (I'm not sure what the problem was but it cost over $800 to fix), another car problem cost $900+ to fix, someone threw a rock through our window (I think they had the wrong house but the damage cost $500 to fix) get the idea. The good part was that we had the money in our emergency fund to fix these problems where as before we would have just added it to the credit cards, paid the minimum monthly payments, and ended up even further in debt.
  4. When Murphy's Law starts hitting you from all sides, you need to refocus your efforts, and any time your emergency fund drops below $1,000 you need to immediately work to build it up again. Eventually another cosmic law takes over and the emergencies seem to taper off leaving your emergency fund in tact for longer and longer periods of time.
  5. Your emergency fund can be used only for emergencies. Your emergencies. It is tempting when you have money "just sitting there" to qualify all kinds of things as an emergency. Your retail therapy sessions, your friend's latest crisis, a much needed vacation, etc. Don't do it. Unless there is a possibility you could DIE unless you use the money (no furnace in January certainly qualified) then don't touch your emergency fund.
  6. You want your emergency fund in a safe, yet liquid, place. This generally means a bank savings account. Leaving that much cash at home can be too tempting to you (and burglars!). Putting the money is a CD or IRA means you can't get at it when you need it without penalties.
  7. You can use your emergency fund for inspiration. When I first put my emergency fund together and got the bank statement showing that I had a little over $1,000 in my savings account, I posted the bank statement right next to my computer where I would see it every morning. This inspired me to keep working at paying off my debt. After all, if I could have $1,000 on a bank statement with my name on it, I could do anything!
  8. Don't tell anyone about your emergency fund. I don't know about you, but most of my family is flat broke. If they had heard I had $1,000 in cash, they would have come up with all sorts of very convincing reasons that they needed to "borrow" money from me. And from experience I know that they are generally never able to pay me back. It is just easier all around if you keep your emergency fund to yourself.
  9. Make your emergency fund work for you. Now that you have some money, you might as well make it earn its keep. Unfortunately, interest rates are super low at this point, however make sure you are at least earning something on your money by putting it in an interest-bearing account.
  10. Your emergency fund should grow just as soon as you pay off your debts. This is another Dave Ramsey rule and it makes absolute sense. When you are debt free, you will have lots of extra cash to put towards growing your emergency fund to what is normally considered adequate--about six to nine month's worth of living expenses. The good news is that this number will now be lower than when you began your journey because your living expenses will be minus all of the debts (and therefore monthly payments) that you just paid off.

Do you have an emergency fund? If the answer is no, I can't recommend highly enough that you make putting together a small, $1000 emergency fund your most important task. Start now!

1 comment:

  1. Oh yes indeed we have an emergency fund! We actually have two: one for the type of emergencies you described, and one if my husband and I both lost our jobs. The balance in the otherlatter covers us for about four months. We're selling one of our cars, so half of the proceeds will go into the no-job fund. (The other half will pay to have our bare concrete living room floor finished with ceramic tile.)

    I really enjoy reading your blog and have been encouraged by your personal story of reclaiming your life from the trap of consumerism. Keep up the good work!