(Guest Post by Joseph)
There are approximately 31 million American’s without a job right now. There are probably at least that many people who have taken a pay cut or a reduction in benefits which served to lower their overall cash flow.
Times are tough right now; I don’t need to tell anyone that (except maybe Apple – apparently they didn’t get the memo). The point is that if you were to lose a source of income and were unable to find employment right away how would you survive?
Or what would you do if you lost 10% of your pay, found yourself living paycheck to paycheck and the transmission busted on your car?
This is exactly the kind of situation you don’t want to find yourself in, because let’s face it, being broke isn’t sexy. Being prepared for emergencies like this is, however.
You need an emergency fund!
You’ve heard it before and you’re going to hear it again. You need to have an emergency fund set aside that you never touch except in absolute emergencies. I’m talking about being laid off or paying for an unexpected life-saving surgery. Something drastic. If it’s not drastic then don’t touch it. Seriously. Financial planners always talk about setting aside money for an emergency fund and predictably most people respond in kind with a comment such as, “I already live paycheck to paycheck, how am I supposed to save for emergencies when I don’t have any money left at the end of the month?”
I’d be willing to bet that 90% of those people could survive if they set up an automatic deposit into an emergency fund. Most people don’t realize how much they spend every month on “discretionary items.” If you think you can’t afford to set up an emergency fund let me tell you that you can’t afford not to set up an emergency fund. It might help if you were to track your money for a few months, I guarantee after you do this you’ll find something that you can do without. Now that you’re convinced let’s move on to the next step!
Make it automatic or else it’ll never happen.
Let’s face it, there are a lot of frugal types out there, but the majority of us don’t have the dedication or the willpower needed to regularly transfer money out of our checking accounts into an emergency fund. That’s where using an automatic savings plan can help. First you need to open a savings account to put your new emergency fund in. Might I recommend ING Direct or another online savings bank that offers a good rate and has a strong reputation? Now that you have an account open to transfer the money to, update your direct deposit so you transfer a portion of your paycheck every single payday into your new emergency fund. By doing the direct deposit you’ll never have a chance to spend the money because you’ll never see it.
How much do you need to save?
Most financial planners recommend between 3 to 6 months worth of living expenses, although some will recommend as much as a whole year. Let’s start small shall we? You need a win to boost your confidence in this new endeavor so I want you to save one month’s worth of expenses (see if you can save this over a three month period). As soon as you have your month’s worth of expenses in your new emergency fund you’ll feel great and it’ll be a lot easier to swallow the drop in your disposable income every month (not to mention you won’t even notice it’s missing anymore after a few months of this). Just leave that direct deposit the way you’ve got it set up now, and before you know it you’ll have six months worth of expenses stashed away for a brutally rainy day (that with any luck will never come).
Let’s take it one step further: You need an “oh-biscuits” fund!
I’m not talking about the edible kind of biscuits either. According to an article I read the other day most American’s couldn’t come up with $2,000 if they needed to. You don’t want to be in this situation. Yeah, you’ve got your emergency fund, but I was serious when I said you can not — NAY, WILL NOT — touch that emergency fund unless something truly drastic happens. So what do you do? You take the same principle that you learned about automating your emergency fund and set up an oh-shit fund.
This fund is exactly what it sounds like it’s for. If something happens that would normally make you swear, you can use the money you have in this savings account. Fix your car if it breaks down. Fix your air conditioning if it breaks down. Pay for a speeding ticket because once again you were driving way too fast down the highway. Stuff happens and rather than putting the cost of “mini-emergencies” on a credit card it’s a great idea to have a savings account like this established.
After you have successfully saved an emergency fund with six months living expenses in it and a “crap happens” fund you’ll be prepared for just about anything life can throw at you (knock on wood). You’ll feel better about yourself, have less stress worrying about what would happen if you lost your job or your pay was cut, and best of all you’ll be able to take the same automatic savings principles you’ve learned to begin to save up for some really neat stuff and say goodbye to credit cards! I told you being prepared for emergencies was sexy!
How are you doing?
Do you have an emergency fund set up? Are you automating your savings? If you do have an emergency fund how many months worth of expenses do you have saved? Have you applied what you learned when establishing an emergency fund to establish an oh-crap fund? Answer these questions in your comments below!
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Joseph has been blogging about personal finance since 2008. His favorite topics are getting out of debt, investing, building wealth and automating everything. You should check out his personal finance blog, Debit versus Credit, and follow him on twitter.
(Photo by Calsidyrose)
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I’m working on my emergency fund and should have it completed by the end of this year. We’ve got $14k in it and our goal is to get it to $20k then leave it alone. But I’ll take it a step further, what would you do if the water from your sink wasn’t drinkable for 1 week, or you had no electricity for 2 weeks?
I like to build layers of security like this because honestly I hate having to rely on anyone else for my own well being. Pay off debt, build an emergency fund, keep some cash on hand at all times, and have some basic disaster preparedness supplies (water/flashlights/canned goods) to sustain you when the systems we rely on fail.
I so agree! I actually wrote about this exact topic on my own blog, today, coincidentally. (http://www.broketo.ca/2011/08/emergency-fund-or-bust.html)
I LOVE the idea of an “oh, biscuits!” fund. That’s really a great idea. Instead of dipping into your emergency fund with this little unexpected hassles, or taking it out on your cash flow, that’s a great alternative. I might put some money aside for that myself!
Recently married, paid for the wedding with CASH. Using our gifts and extra dough left over to start of our life with $10K in an emergency fund. Plus, my wife, who has been underemployed for the past year, will be fully employed come September. We’ll basically be able to save all of her income towards owning a home.
I like the idea of an oh-$#!+ fund. Just last week my brakes took a dump, but luckily it wasn’t a huge deal for us.
@Matt Nice work man, that’s a great goal to work towards! Being prepared for a disaster is a great idea as well, you never know if you’ll get hit with a natural disaster or … worse.
@Melissa Great minds think alike! Yeah my wife and I weren’t comfortable using our emergency fund for stuff that came up unexpectedly so we decided it’d be good to put together a smaller reuseable emergency fund for stuff like speeding tickets, a/c breaking down, etc.
@Dave Congrats on the wedding my friend! That’s got to be a great feeling going into a new commitment like that with no wedding debt and $10k in an emergency fund! Definitely start an oh-$#!+ fund when you can, might possibly be the best idea I’ve ever had :-P
I have an ING savings account which I automatically deposit $30 a week in as well as most of my contract income. I’ve never actually called it an “emergency fund”. It has $5k in it and the goal is to get it to $10k. I keep reading about “emergency funds” and I’m definitely seeing the point, but I’m having some trouble differentiating between a general savings account and an emergency fund since I basically treat my savings account like an emergency fund.
Should I be separating everything instead of just using 1 savings account? For example, I do contract work and I TRY to do tax planning to ensure that I don’t owe taxes, but my manfriend is a 1099er and he always owes taxes, so should I have a separate account for these, as well as a savings and an emergency fund? Has separating these funds helped you guys to save more or better?
Also, in the vein of Matt above, I am slightly a paranoid freak about a real catastrophic emergency and not having access to my $$, so having an ING account actually bothers me a bit. Taking 2 days to get my own $$, while convenient in not frivolously withdrawing it, also kind of disturbs me. With the whole debt ceiling thing, I actually considered taking all of my $$ and moving it to a Credit Union or just getting a safe and keeping it at home. My manfriend likes to point out that if shit really hits the fan then $$ will be slightly worthless anyways – so then I keep thinking, should I really be buying a generator, etc, rather than saving my $?
Sorry, that got long and freakish.
We have an E-Fund close to 13K right now which is about 4 months of pretty bare bones expenses. Ideally it should be bigger, but we’ve been so preoccupied with saving for a house that we said “enough” with the E-Fund. We also have various Oh $#!t funds to help with car maintenance, medical expenses and vacations so that we don’t have to tap into the actual emergency fund.
I’m a huge fan of automation when it comes to giving and saving – it just makes it easier to take it right off the top and you get to the point where you hardly miss it!
Currently I have about $13K in an E-Fund. I’m actually going to end up dropping that to $10K and using the excess to pay on student loans. I’ll be living these next few years off $18K (with a partner also contributing to expenses), so $10K is over 6 months expenses for me.
This money came from a variety of places (I’ve had a “savings account” since I was born). When I was working full-time, saving for grad school, I had a second job that was directly deposited into my savings account – if I never saw it, I couldn’t spend it, right? I was able to save a significant amount of money (around $5,000) working an additional 15-20 hours a week in retail, on top of full-time teaching (and almost full-time retail when we were off for major breaks). Also, about $300 of each teaching paycheck when into my savings account, and I taught a session of summer school for extra cash.
I worked my butt off that year, but I’m financially protected if anything crazy happens while I’m in school.
I set up an Efund this year and so far have a whooping $600 in it. I put $100 in every month but am thinking that I should increase it. Since I live in Canada and have a fairly stable job I am not worried about loosing it…but none I feel that I should increase my contribution. My ideal goal is $10,000 but that may be years away before I get to that amount. The reason I currently contribute so little is that I am saving for traveling and a down payment, but still have doubts about how the funds should be getting allocated.
Can’t stress the importance of that Emergency fund!
It’s precisely because we can’t prepare for everything that the emergency fund becomes so necessary. If you think that finding money for the emergency fund is itself hard, it’s worse when you need it and it’s not there. Foresight and planning! It’s an amazing thing. It sometimes takes a while to get there, but it’s so worth it when you do.
We’re already living on one income since my boyfriend went back to school, so we’ve learned that we can get by on a lot less than we used to. At first you miss some of the things, but after a while you realize you’re doing just fine with less. Once we get back to two incomes, we probably won’t change our spending very much so that we can divert the extra to extra debt payments, retirement, and travel.
I have an emergency fund built up that would cover 3 months of expenses, though I could probably stretch it to 4 by cutting non-necessities. I also have what you call the “oh biscuits” fund (love the name) with $5k in it.
Most of those expenses really shouldn’t surprise us. If you own a car/house/major electronics, you’re going to need to service or replace things at some point. If you’re not budgeting for them already, you need to be able to pay for them somehow without resorting to your credit card!
My entire E-Fund is getting wiped out within the next month. I had close to $5000 at the beginning of the summer but between buying a car (and dealing with the maintenance I didn’t expect), first/last month’s rent and school expenses my hands are tied and I’m hoping to get a job before I spend the remaining money on essentials (e.g. food and rent). I love the idea of an emergency fund though and I really think that everyone should have one :D
Honestly I don’t find the use of a large emergency fund. I think have multiple streams of income is more important and more useful. I think a repair/replacement fund for such needs as house maintenance, car repair and replacement, computer replacement (if it is a need) as well as a small 3-6 EF for loosing your job is important but beyond that, fund other sources of income. If you loose your job for more than 3 months, you should be able to bring something else in, even if it does not replace all of your main income.
Our current EF is $30k. This is about 5 months of income for us. If we really trimmed our budget, this would be about 1 years worth of expenses for us. The EF lives at CapitalOne right now. It’s not automated. We manually transfer all of our money. We also keep a minimum of $2000 in our checking account (we consider $2000 as $0), so there is always enough for those “Son of a Nutcracker!” moments. $30k seems like a lot, but when we look at the numbers, if we both lose our jobs at the same time (or something worse), it seems like a really small number really quick. I would like to see it at $50k, but that will take some time.
@Erin Psychologically speaking I think it’s easier to separate your general savings from your Emergency Fund, Oh-$#@* savings or whatever else you’re saving up for (or to protect against). The nice thing about using ING is that you can very easily set up sub-accounts and the automate your savings every month into each sub-account to help you reach your goals. For example I have my general savings account, an emergency fund, a vacation fund, a home fund and my unplanned expenses accounts. It makes things real easy to keep track of and sets an invisible barrier to keep you from spending your emergency funds on things that aren’t emergencies.
@Austin Nice work on having multiple unplanned expense funds. While the e-fund is certainly important I think that those unplanned expense funds might be more important. Good luck on saving up for a house!
@graduate.living Nice work on saving my friend! It’s such a relief to know that if anything went wrong you’d have months worth of living expenses on hand.
@ShoeGal Nice work on establishing an e-fund. If you can afford to put more away every month it’s always nice to see that number growing. Make sure you don’t neglect an unplanned expenses account as well… I can’t stress how important I think it is to have a couple thousand bucks put away somewhere just in case something bad (but not catastrophic) happens…
We just finished off our 6 month EF with 11k… and We are just about done with all the obligations we have so (a promised x box and we are debt free), so instead of an “oh biscuits” fund we will be focusing on retirement and then doing mini Funds…
One for Health (Dental, Vision, prescriptions, and Doctor visits)…
One for Automobiles (Maintenance, tires, and newer cars eventually)…
One for Vacations…
etc…
But nothing feels so good as 11k in the bank!
“Oh Biscuits” huh? I call my the “FU Fund”… in case work ever pushes me too far (It’s even called the FU fund officially… I love ING Direct’s ability to label accounts)
Emergency funds are a must though, I wish I had one a long time ago when I was broke and drowning in credit card debt, it always seemed like I would do a good job at paying the bills and the second I make the credit card payment something would break and I’d whip out the plastic.
If I had a nice slush fund I’d have been a lot better off.
Good post and the topic is obviously ‘in the air’. I had a big discussion about this over in the UK on a website (not mine) about this one. People over here seem to have decided that it takes more sense to over-pay your mortgage before you build all the ‘reservoirs’ that help cope with dramatic, unexpected events.
Where are we in all this? We have a small ’emergency fund’ – the rest is going on paying what most people call ‘debt’ and I refer to as ‘negative wealth’. Once this is gone, our intention is to build up the serious buffer (£25,000-£30,000) and only after that to approach other financial matters (like the mortgage, for example).
I have investments I can liquidate in less than a week, but I don’t have anything set up to automatically save. When I have extra, I tranfer it to my ING account. But that account is $$ I have set aside to spend on my sabbatical next year (8 weeks paid time off we get every 7 years where I work). I have $4k in there now and will probably add another 3 or 4K before I start my sabbatical next summer.
For immediate emergency needs, I have 2 credit cards (37K limit between them – if it’s more than that I’m probably SOL anyway).
I have reasonably liquid assets I could use to pay off the credit cards if they are needed in an emergency. I have about 3K in investment accounts(non-retirement) I could cash in. I also was lucky enough to invest in some gold and silver back before Buffet got heavy into silver (not saying I’m smarter than him, just lucky timing). I wish it had been more now. But that gives me another $33K I can draw on if the shit really hits the fan.
I believe that the main post was mostly concerned with having an EF for personal emergencies. Matt expands that to include environmental emergencies. If you want to be prepared for those types of emergencies I reccomend having some backpacking gear on hand. I have 3 or 4 days of backpacking meals in addition to probably 1 – 2 months worth of non-perishable food in my pantry. I also have a hand pump water filter that can be used to provide drinking water in an emergency.
If you are planning for something that would not allow you to withdraw funds from bank accounts, you need to keep them at home. (in a safe bolted to floor recommended) However sitting on cash is a losing proposition what with inflation and the weak $. Gold and silver fit the bill for me for long term emergency funds. The value may fluctuate, but the physical metal is always worth something – especially if the $ really tanks).
One thing that I found missing in a discussion on preparing for emergencies is the use of insurance to protect yourself from the unexpected. Good health care, long term, and short term disability insurance can save you from losing everything.
@Maria Nedeva
Throwing everything you have coming in to the exclusion of having an ample EF is a very risky move. You will save the most $$ on interest payments this way. However there are 2 main reasons it’s not the best idea.
1. On average, investments make more than most peoples mortgage rates. So in the long run you are likely to make more on your investments than you spend on interest. A net gain.
2. (And this is by far the most important) If you put everything towards the mortage and pay down the principle to the exclusion of having EF’s and then you lose a job or get sick you will be in a very tight spot. Sure you now owe less on the mortgage, but you are still obligated to pay your regular payment every month. And you will have no way to make your payments.
Paying ahead on debts is great and I highly recommend it. But save up an EF first to give yourself some breathing room should something bad happen to you.
Wow! Some of these EF figures are impressive. I will say, mine isn’t nearly as spectacular. I have a lot of assets, which I can access in a few days or so, but my checking account only has a couple thousand bucks. It was so much easier to save when interest rates were 5% on savings accounts. The 1% or so being offered now isn’t adding up much. That’s why I’ve chosen to pay down the mortgage aggressively. If I lose both of my jobs (not likely), I can sell my car, borrow from the ROTH IRA penalty free or tap into the equity in my home. Right now, it just seems as though paying down the mortgage or investing is a better place for my money. But kudos to everyone with 20 grand! Too bad it’s only making $200 in interest a year.
I have an emergency fund- 20k, separate bank and never touched. Just sit in the event of an emergency.
Back up Fund- fluctuates between 1-5k, I guess this would be considered the oh-biscuits account. I use this for any overages during the month, or things that ‘pop up’ on me, and also stash a little in there for lump sum student loan payments. (Darn evil).
Fun Money Fund- between 300-900 dollars usually. this one fluctuates the most because I use it for vacations, concert tickets and other fun stuff I like to do.
Why don’t I use the EF and pay down student loans? Because it makes me feel good knowing the money is there. I’ll continue to chip away at the beast, but I just cannot give up my emergency fund; especially in these times. Besides, 20k certainly will not pay it completely off so, I chip.
I really need to start working on my emergency fund. I just started a blog to help me with my goal. Check it out!
@Ginger I agree that having multiple streams of income would be substantially more useful than having a large emergency fund. After all, having multiple streams of income would hopefully mean you never ever have to dip into an emergency fund. This is ideal. That said, most people only have one source of income, maybe two, so for the rest of us it’s important to have a minimum of 3 months of expenses in an emergency fund. I love the idea of working toward multiple income streams and I hope that most people can find that! Thanks for the comment.
@WinrWinrChknDinr Nice work having 5 months set aside. I am curious why you don’t automate your savings? Just a personal choice or you’ve just never bothered to set up an automation?
@South County Girl congrats on hitting that 6 month EF! Mini funds are a good idea too — the idea is to have something, how you do it is up to you! Nice work!
@Jeff Love the name for your unplanned expenses savings account. Gave me a good chuckle.
@Michelle good luck working on that emergency fund! A blog is a great way to keep yourself in check. I wish you the best!
@Joseph
We don’t have anything regarding our finances automated (savings or bills). It’s more of a personal choice thing. I like to be the one in control of my money and tell how much of it to go, where, and when. I don’t like to look at the balance, and wonder what happened. And I hate the thought of someone else (other than me) having access to my account to take money as they see fit, even if it is for my own good. Heck, I am not even sure I trust my bank. It’s curious, because I always heard that most financial gurus say not to automate things, and to remain in control of everything.
I have enough discipline to pay ourselves first at the beginning of the month (sinking funds, Roths, and other investments), and at the end of the month (with whatever money is left over from our budget down to the $2000 low limit). It works for us.
I wish I had something like this last year. This time last year I had a accident couldn’t work for two months, had not one red cent coming in, yet I still had bills coming out I’m still trying to get on top of it, but it’s getting the better of me, I have debt collectors calling nearly everyday. It’s been a year to the day and I hate it. As soon as I get my insurance payout I’m opening an emergency fund, because I never want to be in this situation. I would say I would start today but that’s not realistic because I don’t even have a $1 spare. I don’t go out, all my money goes on bills and fuel to get to work otherwise no money. I just keep hoping it will get better.
The automatic part is key. Otherwise most people will simply tell themselves it sounds good an not fund the account. You also need to establish clear rules about what constitutes an emergency, or you’ll raid the money for something less important.
Thanks Joseph! I’m all about the emergency funds so I’m really glad you brought it up and shared the love w/ everyone here. Appreciate you responding to comments and watching out for me while I was gone too – you rock, man.
@Matt – I like that a lot – having emergency items on hand too, just in case the world goes to hell and money is worthless all over! (ya know, like if alients came or the world exploded ;))
@Erin – Oh yeah, seperating a few accounts work out REALLY well for me. I find having them in different places helps me focus and mentally do better every month. Esp with taxes – that stuff scares the bejesus out of me, so SEEING all that money in there really does wonders :)
@Jenny~Z – Oh man, that sucks – I’m sorry! GREAT that you had it all saved up and ready to go for exactly that though, you’ll have it saved back up again in no time :)
@WinrWinrChknDinr – Haha, I do that too — keeping more money in my checking account and pretending it’s $0.00 in case I F up and do something stupid ;) It’s saved me on more occurences than I’d like to admit.
@Jeff @ Stay Thrifty – I had an F U fund too ;) But I got beaten to the punch and was laid off 2 weeks before I wanted to use it! Haha… damn good I was working on it though, that’s for sure.
@Gene – Yup! I agree – having good insurance in place is also VERY very important, especially when others are involved like family or spouses/etc. Though it sucks ass having to dish out money when nothing bad is happening, it def. feels good knowing that you’d be okay financially just in case something DOES pop out of the woodwork. The last thing you want to be thinking about is money when something bad goes down in your life…
@Mike – Haha, right? Interest blows on cash right now BUT if you’ve got a mortgage tied to a variable rate you are LOVING it ;) As I am w/ my 2nd one – though I need to get better like you and start paying it off more aggressively… it is in the works though.
@Ms. S – It’s a damn good feeling, I know! I always prefer having more in the bank instead of $0 and less debt. You can always use your cash to pay off bills, but you can’t take out cash back from them!
@Renee – Oh wow, that sucks :( I hope it gets better for you! Debt collectors are no joke.
it took a couple years to build up, but we have an emergency fund that covers 6 months of expenses (with some belt-tightening & elimination of “fluff” spending)…but in doing some doomsday budget calcs, I realized that it would actually be more than 6 months we have covered. Assuming that we are eligible for UI for 6 months:
– if hubby loses his job, we can cover 33+ months
– if I lose my job, we can cover 48+ months
– if all hell breaks loose and we both lose our jobs at the same time, we’re covered for 9 months.
All our savings are automated, with weekly transfers going into multiple accounts – the less time I have to think about saving, the more likely it is to actually get done. Now that the EF is built up, we can contribute more heavily to our other savings funds: “fun fun”, car, gifts, tuition, house fund (for household misc & fixes), and the relatively newly created slush fund. That slush fund is where extra money goes to each month, and when it builds up, we decide what to do with it – making extra debt payments or put towards investing. Lately, paying down extra debt has been winning out since the market has been so volatile (1% return at ING is better than what feels like an umpteen% loss in my 403b), but I’m set to increase my 403b contributions in the very near future – may as well buy extra while the prices are low!
Heck yeah, now you’re thinkin’! I’m all about buying it up when it’s low, especially since we’re still relatively young :) I like that slush fund y’all are adding up too – that’s awesome. But not as much as your killer Emergency Fund, my word! Great job!
My EF is pretty pitiful right now. Income is tight and bills are high. We have about 1 month worth of expenses in the EF right now. I also have a Christmas Fund of $500 and a small Vacation Fund. Lately, we’ve been dipping into the EF for things like car maintenance because our income has been so tight (it will be improving once my husband’s car is paid off in November! That’ll be an extra $270/month we’ll have available). I should probably take $200-$300 and put it in a separate account for expenses like car maintenance and what not. I think I’ll create one of those Oh-Biscuits accounts today! Thanks for the great idea. :)
Well1 month is still better than 0 months! :) And car problems DUE fall under an “emergency” so you’re all good there. But yeah, breaking it out or doing an Oh Biscuit fun is def. good too – whatever works!