Archives For emergency fund

Are you overwhelmed by how difficult it seems to plan for your future? Do you find yourself wishing it were easier to get ahead? For those of us who don’t make a lot of money, it may be hard to save up an emergency fund or a cushion for the expenses in life that sneak up on us. People preach about having money in reserve for these unexpected expenses, but in reality, it’s much harder to do.

Yet, that doesn’t mean it is impossible nor important. Putting money aside for these type of expenses is very important because it keeps you from digging a whole. While not all debt is evil, it is important to avoid the cyclical nature of it.

Limited Options Without an Emergency Fund

People without an emergency fund saved up are left with fewer options. For those who don’t already know this, fewer options is usually a bad thing. It forces you to make decisions that you may regret later. The more options you have, the more possibilities of selecting a “good” option and not just one that is the best of bad decisions.

Borrowing Money: If we are honest, most people, when faced with an unexpected expenses, are forced to borrow money. The people who are smart enough to limit their negative impact will often reach out to friends and family first. Friends and family are there for these type of emergencies and should be considered before things like payday loans online, but they won’t solve all of your problems. In fact, asking family members for money too often will often ruin the relationship. There are many reputable companies that offer bad credit loans so if you need to, do some research online and try to find a good local company that has a good reputation.

Bad Credit / Collections: The only other option available is to let the expense go unpaid. This will often result in it going to collections and this can ruin your credit for a long time. While you may be left with little or no options, you want to do everything you can to avoid this option.

Be Pro-active!

The best thing you can do is to be pro-active. It sounds like every other advice out there, but it so true. Don’t wait for an emergency to pop up. This means starting with spending less than you make. If you spend every dollar of your paycheck, how are you going to afford the future expenses that are bigger than the paychecks? Not to mention, continuing to pay for the ongoing expenses like rent or insurance.

Start by saving just a little bit at a time. I think if you can see yourself saving a little, you will not only feel more comfortable in yourself, but you will realize how much MORE you need to save.

Stop giving yourself limited options in life. Take control of your finances and act today.

Building an Emergency Fund

August 28, 2012 — 4 Comments

An emergency fund can be very handy at times. An emergency fund can cover all different types of potential “emergencies.” It all of course depends on the person or family.

An emergency can be job related. Maybe you lost your job, will be taking a pay cut, taking reduced hours or so on. Maybe your car broke down and that is the only form of possible transportation for you. Your emergency fund could then also cover buying a new-to-you car as well. Of course, an emergency fund can also cover all types of other events: medical, house repairs, and so on.

However, it can also be very hard to build up your fund. Determining the amount you need, building up that amount, determining what will constitute a financial “emergency,” and so on can be difficult.

The first step is to decide how much you want/need in your emergency fund. Different financial advisers recommend different amounts. If your job is steady, then 6 months might possibly be either too much or just perfect. If you are self-employed, then it is possible that you might want a higher amount in your emergency fund because the likelihood of you having to dip into it might be a tad higher.

If you’re paying off debt, the recommended amount is around $1,000 by some advisers so that you can focus more on debt. I’m different though, I have debt, but I prefer to keep my emergency fund full at around $15,000.

For us, we prefer to have a fully funded emergency fund. We are more comfortable with it being fully funded, so that we are fully prepared. Our emergency fund is designated towards any potential job losses or any potential repairs that may be needed around our house.

We have a friend who did not a have theirs fully funded, and they had to pay $6,000 for a whole new air conditioning and furnace system in their house. In the end, I believe that had to just put it all on a credit card, and it would be hard to pay off a $6,000 credit card bill within one month so that it does not accrue.  This is something that we definitely do not want to happen to us. And we also don’t want any extra stress added on to us financially if it did happen. And this is what makes having an emergency fund worthwhile.

The $15,000 in our emergency fund would pay our basic expenses for around 6 months if something were to happen, or if we needed something to be fixed, then we won’t have to accrue more debt to get something fixed around the house.

Another question to ask yourself is where and how your emergency fund money will be stored. Do you prefer to keep it all close and store it in your house (this is not something I recommend)? We keep our emergency easily accessible in a savings account. Yes, it accrues very little interest, but it is readily available for us in case there is some sort of financial emergency where we need quick cash. Some also invest their emergency funds in the stock markets or put it into money market accounts.

There are several ways to build up your emergency fund quickly:

  1. Pay yourself first. This will help you to save quickly. Designate a set amount of money form each paycheck to go towards your emergency fund.
  2. Save as much as you can. This can include eating at home as much as you can, stopping your clothing spending for some time, watching your utility usage, eliminating or reducing your cable or cell phone bills and so on.
  3. Find ways to increase your income. Maybe trying finding a part-time job. This can include working maybe at a retail store, waitressing or finding a side gig. Side gigs can include online income, babysitting, walking dogs, and so on. Even if the pay is small, they will add up quickly and help you reach your emergency fund number quickly.

How did you choose how much to put in your emergency fund?

Do You Have Enough or Too Much in Your Piggy Bank Emergency Fund?       I can hear the claims of “Heresy!” ringing out through the personal finance world right now. How can I say the 3 to 6 month emergency fund rule is stupid?! Before you give yourself a heart attack, you need to realize that I’m not saying an emergency fund is stupid. Not by any means! In fact, I’ve written several times already about why you need an emergency fund, where to keep your emergency fund, when you should use your emergency fund, and how to build up your emergency fund. Clearly, I have nothing against emergency funds.

       No, my problem is with the silly rules of thumb that get thrown around with the idea of the emergency fund. Some say you need 3 months of your expenses, some say 6, and some say 9. I’ve even heard 2 years! The problem is that all these simple rules of thumb make the same mistake that other rules of thumb make – they ignore your circumstances.

Base Your Emergency Fund on Your Circumstances

       An emergency fund based on 3 months of your living expenses may work fine if you’re married and both of you have stable jobs with comparable incomes and you have your finances under control. But change just one of those variables (marital status, job stability, income disparity, or financial situation) and you can forget about a 3 month emergency fund doing the job.

       The size of your emergency fund needs to be tailored to your circumstances because the riskiness of your situation is determined by what’s happening in your life – not what some rule of thumb tells you. Now, I’ll grant that a 6 to 12 month emergency fund is going to be in the right zone for most people, but I wouldn’t leave this to a guess. You need to take a few minutes to think about your situation and adjust accordingly.

       For example, if you’re single then you probably only have one source of income. That puts you at a higher risk in case of a job loss than someone who is in a two-income household. The same goes for your job stability. If there’s little risk you’ll lose your job (maybe a government position?), then you’re probably a bit safer than someone in a cyclical industry (car sales, perhaps).

       If you’re socking away 20% of your income, a small emergency might not bother you too much. You can easily divert your money away from saving for a bit and go back after the emergency has been covered. But if you’re struggling to make it from one paycheck to the next, even a small $100 car repair can throw your whole world into a giant mess.

       It’s these kinds of factors that should determine how much you need in an emergency fund. I’ve talked about how much you need in an emergency fund, so I’m not going to go over it again. But keep in mind that even my article is just a general guideline. You’ll still need to think critically about your specific needs and situation.

Beware Rules of Thumb

       I’ve written several of these types of articles over the last few months. I talked about the stupidity of the save 10% for retirement rule, the 2.5 or 3 times your income for a mortgage rule, and the 80% or 90% of your income for retirement rule.

       All of these rules are guilty of oversimplification, a complete ignorance of your unique circumstances, or both. Yet some people rely on these rules of thumb for their most important financial decisions. I’m not saying you need a financial planner. But please do yourself a huge favor and take some time to think about your situation and what makes sense for you. Don’t rely on stupid rules of thumb to determine your financial future!

Any Other Rules of Thumb?

       What financial rules of thumb have you heard of that you’d like to learn more about? Are there any you question but aren’t sure why they might be wrong? Let me know in the comments below and I’ll be happy to write an article specifically tailored to answer your questions!

(photo credit: Alan Cleaver on Flickr)

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