As we’re starting out a new year, my wife and I do a summit on goals, including financial ones. One thing we finally did a few years back was establish an emergency fund that covered about three months of raw living expenses (food, shelter, transportation). Since we both work, and both make in the same ballpark, our family income is diversified and thus the likelihood of both of us losing our jobs is smaller thus we still have a source of income. If you’re in a household with varying income based on commissions, or a single breadwinner, or an income that is disproportionately on one person, I’d recommend more maybe to the tune of 6 months or a year.
Does it suck to save this much cash? Absolutely. Does it take a long time? Yes, but you can do it if you chip away a little at a time. I’ve got a few suggestions below that could help. What an emergency fund does provide is massive peace of mind. You know that should you suffer an actual emergency (car dies, injury or illness that puts you out of work for awhile, job loss, furnace or appliance breaks) you have the capital to handle it. You don’t need to worry about if you have balance in your credit cards (you don’t carry a balance, right?) or have to rely on a line of credit for your home. Both poor strategies, and ones the bank can pull when they see fit. While some may argue against the need for a fund, I think it’s necessary for those of us who sleep better at night.
Here’s a few thoughts on getting things rolling on an Emergency Fund (E-Fund):
- Set up a separate account from your regular bank. I prefer an online account such as Capital One 360 or Ally as you can get 0.75-0.99% interest on what you do have. Not great, but MUCH better than most banks or credit unions.
- Set up an automatic withdrawal from your normal bank. You basically link to your checking account and the new account automatically pulls money into the E-fund on the interval you provide. We do ours on a per-paycheck basis.
- We use this strategy for other savings goals, setting up sub-accounts like car savings, vacation and so forth, depositing funds away from our standard checking and savings account that get used as more regular shock absorbers for less regular expenses.
- If you get a tax refund, or work bonus, start dumping all or part of it into the E-fund to reduce your time to reach your goal.
To illustrate the peace of mind this can give, let me tell a brief story. In 2013 we had almost built up our E-Fund to our arbitrary goal number of $10,000, where we were about to then start saving towards other things. We were pretty happy this goal was finally almost there when Holly lost her job. She was making more than me and besides the emotional anxiety it caused her, she thought we were about to enter the poor house. I mean, we were living like most do on most of two salaries. Well, we had a number of shock absorbers in place in addition to our E-fund, but the e-fund played a HUGE role in peace of mind during this period. Here’s what we did:
- No more after school or summer child care since Holly now had time, even with the time spent networking and job hunting
- I dropped my 401k contributions down from 17% back to 10%
- Cut back on consumption some
That was it. With her unemployment income, and factoring in when it would end if she couldn’t find a job, I gave her the news that set her mind at ease tremendously: we had over 18 months to figure this out. And that was without doing anything else or cutting our lifestyle even sharper. When your overhead (i.e. debt) is low, and savings adequate, you can coast for a long time in less than ideal circumstances. And really, we only needed it for a few months, but we didn’t know that at the time.
Anyway, I hope to not have to touch our E-Fund very often, but it’s there if we ever need it again and it does help me sleep at night. Good luck to reaching your own financial goals this year!