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Day 22: The Emergency Fund
A brief history of my Emergency Fund –
Before I decided to get out of debt, I did not have an emergency fund. I lived “paycheck-to-paycheck” and if things got “tight” at the end of the month, I would whip out the old credit card and “solve that month’s money problem”. Of course, all that I was doing was pushing one month’s problem into the next month, and so on and so on.
When I finally decided to get my financial house in order, the first thing I did was establish a mini-emergency fund. I sold things on eBay, I had a yard sale, and I started living on a strict budget. Very quickly, I was able to put $1000 into my savings account. (Click here and here to read about times when I had to dip into my emergency fund.)
After getting out of debt, my next goal was to build up a big-time emergency fund. I wanted enough money in my fund so that if my wife or I lost our job, our family would be taken care of and neither of us would have to rush out and take a job that we didn’t enjoy. After some consideration, I settled on the nice round amount of $20,000. I spent the next several months piling up cash and putting it into savings. I never really considered interest rates. My goal was to a have a readily available cash supply, set aside for a true emergency.
Now that I am maxing out my retirement contributions and education savings account contributions, my emergency fund is just “sitting” in my savings account, earning interest. I don’t really worry about how much interest it makes, because this money is not to be used for investing or spending. Nope. The money in my emergency fund is for – you guessed it – emergencies!
I also have a small amount of cash in non-retirement, long-term savings. I have divided this amount between a standard brokerage account and my online savings account. Each year, after I max-out my retirement and education savings contributions, I will then pile up as much cash as I can in my brokerage account and my savings account. This money will be used for future “major purchases” – cars, furniture, etc. My super-long-term goal is to buy a house – with cash!
Leave a comment about the security of having “an emergency fund”.
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I cannot stop singing the praises of the Emergency Fund!!!! This has been so far my favorite part of being on the Dave Ramsey plan, especially since three weeks after I set it up the heat went out in January. If anyone doesn’t have one yet, GET IT! The peace of mind is truly priceless.
I would certainly pay attention to the interest rate. It is an emergency fund, yes, but it is also a decent chunk of change that can be earning you good money. So unless you already have one of those high performing savings accounts, I’d consider switching it to short term CDs.
I’ve done that and have managed to find rates in the 4.9-5.1% for 6-12 month CDs. My life has been fairly stable so far, and I’ve actually set up a much smaller emergency fund where I’m not too worried about the time delay. However, I plan to transition it to a CD laddering system as soon as I can. That’s where you buy a whole series of CD’s (say a range from 6 months to 5 years, for example, with the amounts spread evenly across them in 6 month increments). Then as one expires, you put that money into the longest length CD of your original CD ladder. It’s a way to average a bit higher return rate on that money over the long hall, but (unless you get hit by a huge debt all at once) still have good access to the money if you need to get to it. If you are earning less than 4 percent on your savings account, move that money! You can achieve the same goal and also see better growth.
When I mentioned a smaller emergency fund I meant an additional one. Obviously, you need some money in an emergency fund that you can access right away. But the rest can be shifted to a higher earning set of investments quite easily with the CD laddering system and not result in losing much of the advantage of quick access in case of emergencies.
I suggest at least ensuring that the interest rate on your emergency fund is at least as high as inflation, that way you aren’t losing any money. I don’t find it any more hassle to use a high interest account compared to a low interest account.
I agree that having an emergency fund offers great peace of mind! I only have a BEF of $1,000 right now but as soon as we are out of debt I will try to save $30,000 (6 months of expenses).
It only took you several months to save $20k? Wow.
Hi NCN,
I’ve found your blog to be pretty inspirational overall. I reference you in my post for today where I encourage my friends to start an emergency fund. Just wanted to say thanks!
A
https://www.ncnblog.com/2007/09/28/day-22-of-33-days-and-33-ways-to-save-money-and-reduce-debt-the-emergency-fund/
Well, that’s a little foolish to not worry about the savings rate.
After all, if the emergency fund is just sitting there, it could be earning 5.05%/yr at EmigrantDirect (or more in other places).
Compare that to earning 0.75% (yes below 1%) at my local bank (unless you put in $50,000 or more, where it would go up to a “huge” 2.2%).
As an example, there’s a little chart on Wikipedia (http://en.wikipedia.org/wiki/Rule_of_72), that shows that using the rule of 72, 1%/yr would take 72 years to double, but 5%/yr would only take 14 years to double.
Personally, I’d rather wait only 14 years (or less) to get double my money, than to wait a lifetime.