Building Your Emergency Fund
An emergency can happen at any time. A special fund that you create for an unforeseen circumstance like an unexpected job loss or illness will see your family through it – all the while preventing unnecessary debt and the associated finance charges that could be very easy to accumulate.
How Much Is Enough?
The answer depends on your individual situation and how much you spend. In Smart Women Finish Rich, David Bach recommends that his clients save three to 24 months of living expenses. He explains that the “right amount” is different for every individual and depends upon one’s own comfort level. Other experts like Suze Orman recommend at least eight months of your salary to pay for the mortgage, if you own a home, in addition to basic living expenses. Most experts agree that the size of your emergency fund also depends upon how easily it would be to replace your current income if you were to lose your job, considering your current salary and position. Finally, one thing to remember is that once you’ve accomplished your goal of creating this fund, no matter how much you have saved, you’ll have less stress and the peace-of-mind to focus on other priorities like saving for retirement or your child’s college education.
What if I Have Credit Card Debt?
Whittling down unsecured debt should always be your first priority when it comes to your finances. So, if you have credit card debt, you should try to pay that off first. At the same time, however, it is important to try and save at least a little each month. One strategy to consider is to save the first $1000 towards your emergency fund. Then, pay down your debt until you are free and clear of it. Go back to saving for a rainy day after you’ve accomplished this goal.
Where Do I Start?
You can begin saving towards an emergency fund with as little as $5, $10 or $25. Before you figure out how much you can save, calculate your basic living expenses and make sure you have enough to meet them. A high interest yielding money market account is a good place to begin depositing your money. With a three-month bonus rate of 2.25 percent and an Annual Percentage Yield (APY) of 1.51 percent, EverBank’s Yield Pledge Money Market offers a high yield, FDIC insured account. Another good option is ING Direct’s Orange Savings account with an APY of 1.30 percent and no under the limit fees.
Out of Sight, Out of Mind
If you are tempted to spend your savings, put it in an account that is hard to get to. My friend from Los Angeles (let’s call her Fran) has kept a bank account that she opened when she was single, even though it was acquired by another institution in Arizona and moved there after its purchase. Now that Fran is married and has two kids, she uses this account to save her emergency dollars. “It helps that I can’t get to it easily — I generally can only make deposits or withdrawals from it by mail.”
Cut Your Budget to Save More
To ensure that you are saving the optimum amount towards your emergency fund, see where you can cut your expenses. Here are a few Ideas recommended by some parents we talked to.
Opt for a Pay-as-You-Go Cell Phone Plan: Do you really need all those rollover minutes? Page Plus Cellular offers a pre-paid cell phone plan. At $29.99 a month, Talk n Text 1200 with 1200 minutes, 1200 text/MMS messages and 50 MB of data offers a cost-effective plan that serves most people’s needs. Unless you make a lot of international calls or go over your allotted voice usage, this plan can help put more cash in your savings account.
Stash Away Cash: After you pay all your expenses and deposited whatever you’ve decided to put away monthly, take the remaining cash out of your checking account and sock it away in your drawer. Use this cash to pay for groceries and anything else you need for your household.
Comparison Shop: To get the best deal, seek out at least three bids for items like auto and home insurance. You might be able to save hundreds of dollars by choosing the least expensive plan.
Forgo the Daily Latte: When you do the math, you’ll be amazed to realize that the $3.50 or more a day that you save by skipping the trip to Starbucks can add up to over $1200 per year. Why not save it for a rainy day? If you must, you can still treat yourself. You’ll still do okay by limiting yourself to one Latte per month.
Refinance Your House: If you are a home owner that bought before the market’s peak, there might be enough value left in your home to refinance into a lower monthly housing payment. Interest rates are still low. As long as you qualify with an acceptable credit score and DTI ratio, this option could help you save significantly on your monthly mortgage payment.
Sell Your Car: If you have an extra car that you own outright, why not unload the one with the car payment? Most large metropolitan areas are easily accessible by public transportation. And there is always the option of carpooling. Alternatively, if you have a new car, you can downgrade for a cheaper, used model.
Curl Up to a DVD and Meal at Home: Stay-in instead of dining out. It’s more economical and generally healthier – allowing you to better control the quality of food you eat. And if you have an account with a company like Netflix, it’s affordable and convenient to keep up with the latest blockbusters.
Remember, a penny saved is a penny earned. And in this economy, being prepared is a very good thing.
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