This is a guest post from Brooke at Dollar Frugal. Brooke writes about ways to get to the bottom line on your life costs. If you like this article, check out her RSS feed.
An emergency fund is one of the first things you should build up before getting crazy with paying off debt or even buying a home. But I have a better reason for you to have an emergency fund: so you can sleep at night. Plain and simple. Here are some other advantages to having a sizable emergency fund:
- You can increase insurance deductibles. Crash the car? The house burns down? If your deductible is higher, you’ve been paying less annually for insurance, but you have enough in your emergency fund to cover the deductible.
- You don’t need a new car. Your car needs repairs? Just get it repaired. This will be much cheaper than a car payment.
- You will earn a little interest. It’s not much, since the cash should be pretty liquid, but every bit helps.
- If your car breaks down, you won’t get a huge headache trying to figure out what pot of money to borrow from. You can just get it fixed, then refill your emergency fund.
- You don’t need a credit card. I haven’t had a credit card for seven years. I never need one, but that’s what the emergency fund would be for.
There are many more reasons to have an emergency fund. Where has your emergency fund saved you?
If you don’t already have a sweet emergency fund, don’t worry. You can rustle the money up quickly by reading personal finance blogs, and the more money you save, the quicker you’ll be fully-funded. Here are some quick ideas that you probably won’t even notice if you plan ahead:
- Bring your lunch to work for a month.
- Bring your family together for a family meeting and tell them you need to skip going out to eat for a couple months, and are instead going to try new recipes at home, as a family. Each family member gets to plan one Saturday night’s menu.
- Plan your car trips in advance. Try consolidating trips to conserve super-expensive gas.
- Don’t buy anything (except food) that isn’t necessary for a month or two. This is how I live anyway, and my family and I are still alive.
- If you don’t have a family, try hanging out with your more industrious friends.
- Get a second job for a few months. This is serious. You will only have to do it for a few months to get the first thousand before starting to pay off your debt.
These are just a few ideas, but I’m sure you could get your first thousand in a month if you followed all these steps. What are some things you have done to save up your emergency fund?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
@Bennie - I also went to your site and your email (firstname.lastname@example.org) came back as undeliverable. Try emailing me at email@example.com.
@Brooke - Currently my wife does not work, she is going to school and trying to get her associates first. I got fired from my last job, due to a disagreement with my boss. I am a web designer, and have been trying to do things freelance, but it's just not working. I can't seem to find a job either. I went to your site, but couldn't find your email address. Mine is on my page, and should be easy to find in the contact section.
@Bennie - thanks so much for commenting. It sounds like you need to get a job again - but don't let me sound insensitive by saying that. I don't know the situation that you do not have a job in. Does your wife work? Even if you can put $20 in your emergency fund, you should. Of course, after you have $1000 in your emergency funds, you need to get rid of the credit card debt. You should make minimum payments until you get an emergency fund. Of course, you should not be negative in your checking account before any of this. I recommend you have a long sitdown with your wife and let her know that this cannot continue. Your marriage will survive, but you and your wife MUST be a team before you start to fight. You could also email me (I don't want to get spammed out, but you can go to my site and look at my email address) or Jeremy here at this site to get catered advice just for your situation.
How do you even get to a point to be able to start saving for an emergency fund? I have over 2000 dollars in credit cards, and I also now am over 400 dollars in the negative of one of my checking accounts. I have not had a job for a couple of weeks, and when I did have a job it seemed like we were not able to save anything cause stuff kept coming up. Me and my wife have been married for 10 months this month, and fight over money all the time. HELP!
@Jeremy - thanks so much for publishing for me!
@Singleguy - that's really cool that you could help your friend!
@Fiscal Musings - that is exactly how we run our retirement savings. We "pay ourselves first," then figure out where to get our daily expenses from. You don't even miss the money.
@Frugal Dad - I halved my premiums by raising the deductible. Insurance companies are a racket, if you ask me. If I had enough money, I wouldn't have insurance - I read that in California, if you put a deposit in to the state, you can skip insurance. And homeowners and life insurance would not be necessary if I already had the cash.
@Adfecto - In our house, the emergency fund is only for emergencies. It really depends on how tight your budget is - you might want to rework your budget to include items like clothing or textbooks, as these are recurring expenses. Things like the air conditioner stopping working, the fridge not working, or the car not having brakes constitute an emergency in our household.
We have one credit card that is only in case one of us dies or a tornado hits or something. That would be a true "emergency" and the only reason we would use a credit card. I know, I know, I'm missing out on tons of points and cashback deals, but I know how I am and I need things simple right now.
Adfecto, here is how we classify what is an "emergency." We don't use credit cards, but have a couple of them on standby for certain emergencies. The actual emergency fund is there for all unexpected and necessary expenses. This would include having work done on a vehicle, replacing a household appliance, etc. As long as the expense doesn't instantly drain the whole fund, that is where we go first.
If it is a relatively minor expense that we would have no problem paying for in full over the course of the next month with our regular cash flow, I don't mind putting it on one of the credit cards as long as it gets paid off by the end of the month. But I try to always go to the savings first as to not get into the habit of using the cards.
If you're having trouble deciding between a real emergency and just discretionary funds, you may want to set up a second savings account for those items specifically. It doesn't have to be nearly as big of a savings pile, but having $500 bucks on hand for a few pair or shoes, a fun night out, or other non-emergency type items that often come up.
I've scraped together almost $2 grand for my emergency fund over the last year. My problem today is that my car needs work, but I don't want to raid my emergency fund. The $400 repair bill seems small enough for me to pay out of my regular living money, but history has shown that I won't tighten the belt enough and run out of money by the end of the month. However, I would almost rather seem my credit card balance go up than see my emergency fund balance go down... I know it is crazy talk but it took so much to build it up I don't want to use it! How do you decide what constitutes an "emergency" and justifies raiding savings? For example, I needed to buy two pairs of shoes (one for the gym and one for work) for which I hadn't planned. Is that $100 shoe expense enough to raid the emergency fund? What about redoing the brakes on the car? What about text books for my wife? Ugh.
That's a good strategy, Jeremy. Great article, Brooke. Being able to raise your insurance deductibles is a great benefit of having a solid emergency fund as it will lower your premiums - especially true of car insurance. When I got my emergency fund in place I raised my deductibles from $500-$1000 and saw a significant reduction in premiums.
That is similar to what we do, although it isn't a percentage. I just have my employer's direct deposit send $100 from each bi-weekly paycheck into our savings account, which acts as our emergency fund. Out of sight, out of mind. After a month or two, we didn't even notice the money was missing.
Everytime I get paid I put a certain percentage into my emergency fund. I don't ever have to think about how much to save, it's just a set percentage of everything I make.
I have an emergency fund and I haven't had to use it for myself. I had a friend that had an emergency and she did not have an emergency fund and I was able to help her.