Tuesday, June 25, 2013
Emergency Fund 101
Once again I am horrified at how ill prepared many Americans are for even the simplest unexpected or untimely expenses. The latest numbers hot off the press indicate that 27% of American households have no emergency savings at all. If you don’t have at least $1,000 to $2,000 in an emergency fund, consider it an emergency that requires immediate action. What if you have a flat tire? Then what? The most likely answer is the credit card at 18%, an option that will almost assure another emergency. Every family or individual adult living on their own needs an emergency fund. This is absolutely basic. If you have less than $1,000 in free cash ready to fund an unexpected event you are playing with dynamite. If you are starting with nothing or worse—start today. This is important enough to radically alter your behavior. Sell some of your stuff, especially items that you no longer use or luxury items. These could include children’s clothing and toys, electronic gear, jewelry, motorcycles, tools, or firearms. Take a part time job, not for the rest of your life, but until you have a couple of thousand in the bank that you don’t need to tap on a weekly or monthly basis. If you have the opportunity to pick up some overtime at your current job, volunteer. Back in the day when I worked at a textile mill, I discovered that if I always worked overtime when my boss needed me I could get overtime when I wanted it but the boss really didn’t really need me. Time and a half is a quick way not only to build your emergency fund, but a way to bump your salary. Until you have built a basic emergency fund, I would recommend that you go out of your way to cut your living expenses to the bone. This would include going cheap on cell phones, cutting the cable, giving up restaurants, and especially lottery tickets, cigarettes, and beer. Keep this money in the bank or credit union. A simple federally insured savings account or money market fund is all you need. It won’t pay much of any interest, but it is safe. In such an account it is easy to get at your money when you need it, but not too easy. The emergency fund is for emergencies, nothing else. Imagine that this money is sitting in a glass box marked for emergencies only. If there is any other way to pay for something other than debt, don’t tap the emergency fund. As you build up savings for special purposes, such as automobile repair, vacation, Christmas, and (yes) medical expenses you will be less likely to need money from the emergency fund. Even though we are blessed with very good health insurance, my wife’s recent cataract surgery involved over $5,000 in unexpected expenses that were not covered by our policy. For as long as I can remember, a six month emergency fund has been recommended by financial experts. That means your long term goal is enough money to cover six months of expenses if you lose your job. Don’t beat yourself up if you are not there. Just keep building up your savings until you reach that goal. Always keep the emergency fund money in something like a savings account or a money market fund. These dollars are not for the purpose of investment. They are a life raft that will keep you afloat if something happens to sink your ship.