Financial Preparedness – An Emergency Fund Provides Peace of Mind

October.  It’s usually in October when the days get crisp and the nights start to feel frigid.  There usually comes one day that I just can’t take it any further.  I feel the overwhelming obligation to flip the switch on our thermostat from “cool” to “heat.”  On that evening that no large groups of people did the same thing, I can bet that more than just a few of them turned their heat on and a few hours later realized it was still cold in their respective homes.

The group to whom it happened could be subdivided into three more groups.  This first group of people panicked because they don’t have any room left on their credit cards to charge a furnace repair.  I’m not sitting in judgment, just stating what is true, and I KNOW not everyone gets there by their own doing.  My heart goes out to the people in that group.  The second group of people doesn’t necessarily panic – though ‘thoroughly frustrated’ may be a phrase that could be used to describe them.  They have the ability to put a furnace repair on a credit card, but they can’t swing the cash for a repair.  The last group of people doesn’t like it but don’t bat an eyelash because they had money squirreled away for circumstances such as this.

Why is that?  The third group of people had an emergency fund.

What is an Emergency Fund?

According to Investopedia, an emergency fund is:

An account for funds set aside in case of the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major repair to your home.

An Emergency fund is money set aside that keeps an annoyance from becoming a potential disaster.  It’s also been described as a “just in case fund” or a “rainy day fund.”

Why do we need an emergency fund?

Have you ever heard of “Murphy?”  Murphy seems to visit each family at different intervals.  He seems to visit some families quite often and other families he tends to leave alone.  He can even be fickle within families.  One thing I have learned about Murphy though is that he tends to visit families with fewer means more often than he visits families with more means.

Unfortunately, Murphy showed up a lot in our house when funds were tight.  Both of our kids needed new shoes.  Having twins first, this could constitute an emergency when we were living on $1200/month.  Yep, that’s all we had for the house payment, groceries, utilities, gas, car payment, EVERYTHING.

Even as things change

Then as we were able to loosen our belts a little bit, we could absorb new shoes – even for twins, but other things became an emergency.  One day we discovered that we had water leaking into the back room of our house.  That was bad enough, but when we talked to our insurance agent and found out that we had a $1000 deductible on our homeowner’s insurance, that was really bad.  We hadn’t yet developed our emergency fund or even heard of the concept of an emergency fund.  How were we going to have our roof fixed when we didn’t have the thousand dollars?

But times have changed.  Now we’ve decided not to wait any longer to replace the timing belt in my husband’s car.  We don’t have $1000 in our car repair sinking fund yet, but we’ve been steadily building up our emergency fund so that even with having to replace the timing belt to the tune of about $1000, we can do that.  For those of you who don’t know, if the timing belt breaks, it will completely ruin the engine of your vehicle leaving you to buy a new engine or a new vehicle.  Knowing this, we just don’t feel comfortable kicking that can down the road any further.

Murphy doesn’t seem to visit us as often as he did.  I fully believe this is because we have a plan in place and some money set aside to protect us in case anything happens.

This is the same for you.  Murphy will tend to visit people who are financially prepared less often than those people who are NOT financially prepared.

How much money goes into my emergency fund? 

Dave Ramsey recommends that if you have any debt of any kind (minus your house) you should start with a $1000 Emergency Fund.  This is big enough that you can cover most real emergencies and small enough that you should be able to tackle it quickly – Don’t believe me, hang in there until the next heading.

For those of you (this is where we are) who own a house that is not yet paid off, but you have no other debt, Dave recommends that you have 3-6 months living expenses in savings.  If you have a stable job and everything else looks normal – like you have no major medical conditions, you’ve been at your job awhile, and you’ve been keeping up on routine maintenance issues, then a 3-month emergency fund should suffice.  If you are new at a job or you do have a medical condition or you only earn commissions, then a 6-month emergency fund is more recommended.

You determine what it takes you to live on each month, by looking at your budget.  If you were all of a sudden without income, what line items of your budget could you live without?  Which line items of your budget could you reduce drastically?  Once you’ve done that, see what is left in your budget and that is what you need for one month.  Multiply that by 3 or 6 and you have what you should be shooting for in your emergency fund.

How do you fund an emergency fund?

Karen, I’m BROKE!!  How do I fund an emergency fund?

Here are some simple (though not necessarily easy) ways to fund your emergency fund

(1)  Automate your savings

I’m a HUGE fan of automating anything that I can.  This includes setting money aside in your emergency fund.  Many banks allow you to transfer money from one account to another account automatically.  If your bank offers this, then take advantage of it.  Another option, along the same lines, is if you get your paycheck directly deposited into your bank account, see if they will allow you to split the amount between two accounts, so you never see it.  You have it if you need it, but it’s not right in front of your eyes.

(2)  Put your savings in a separate account

Are you always tempted to dip into your savings?  Put it in a separate account or if you’re REALLY tempted, put it in a separate bank and don’t have a debit card associated with it.

(3)  Cut back on what you’re currently spending 

If you’re just starting to learn sound financial principles for the first time, I’m betting you there are areas of your budget that you can cut out.  Need help in this area?  You can check out two blog posts here and here.

(4) Sell something…..

or a lot of ‘somethings.’  Can you live without two cars?  It’s also less insurance and possibly less gas so you might have extra savings.  Do you have exercise equipment sitting around that you don’t use?  Sell it!  Declutter your house and have a garage sale or list items for sale in Marketplace on Facebook, eBay, or Craigslist.

(5) Take on a part-time job

This doesn’t have to be a typical “second job.”  Heard of Uber?  You can do that on your own schedule.  Have a free evening, you can drive.  Expected to have a free evening, but you don’t?  No worries!  Drive when you can.

Know how to play the piano?  Take on piano students.  Have neighbors who need their yards mowed?  Offer to do it for them.  Can you sew?  Let people know you’re available.  Or you could get a regular second job at a brick and mortar type establishment.   Take surveys.  You can actually earn money for it.  Here’s a list of six reputable survey companies.

(6) Use your income tax return, bonus, or unexpected windfall

I know it’s only October, but when it comes to February, March, or April of next year, if you get something back from Uncle Sam, use it to help fund your emergency fund.

How do you use an emergency fund?  

Only use your emergency fund on an emergency!  So I thought I would look up the definition of an emergency.  According to the Oxford English Dictionary, an emergency is “a serious, unexpected, and often dangerous situation requiring immediate action.”  So ask yourself.   (1) Is what you want to use the money on serious or necessary?  Do you actually need it for life to continue in a fairly normal way.  (2) Is what you want to spend your emergency fund on unexpected? In other words is this something you should have planned for……..like Christmas which comes on the same day each year.  (3) Does it require immediate action?  Will there be consequences if this isn’t taken care of right now?

Where (or in what) do you keep an emergency fund?

Keep your emergency fund in something that you can get to easily, but not TOO easily.  On one hand, keeping your emergency fund in the ‘normal’ checking account is probably not a good idea, but keeping it in an IRA where you can’t get to it easily is also NOT a good idea.   Find a place that is not someplace that you can get to in less than thirty minutes, but someplace you can get it from in less than 24 hours.

What about you?

Emergency funds – Have you heard of them?  Do you have one?  Did you have a fully-funded emergency fund at one point, but no longer?  I’d love to hear.  Share with us in the comments section below.

Together let’s Love, Learn, Practice, Overcome

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