The rough economy the last few years has really brought many Americans back to the basics. Back in the day, people used to actually have money sitting in the checking account (or under the mattress) "saved for a rainy day". That whole emergency fund idea kind of went by the way-side when the spending/investing era took off (mid 80's). Sometime around the collapse of the Berlin Wall, people decided that it was foolish to save money in a liquid account for emergencies. It was so popular to just spend it and enjoy yourself (after all, money was so plentiful), or go for the "big gains" in the stock market. Wake up call---jobs are scarce, debt is huge, housing market tanks, oh no! When a real financial emergency does happen, you may need several month's worth of expenses to be available. Most financial experts agree that at least three to six months of expenses are necessary but how much that means for you is the question. First, you need to know how much you really spend each month. You'll need to track each expense daily for several months to get a good idea of just how much you spend. Keep a running log and don't forget the little spends (magazines, coffee, vending machine snacks, etc.). Once you have a good idea of how much you spend each month, figure out how much of that you would actually HAVE to spend if a real emergency took place. For example, even though you might have spent $800 a month on groceries, if a financial emergency took place you could definitely cut way back if needed and maybe only spend $500 or less. Add up all the "needs" and get the cut-throat total. Multiply this by whatever makes you more comfortable (3-6 months) and you will have a good idea on just how much money you need to save in the emergency fund. Keep saving until your fund is fully funded...making sure to keep it liquid. DO NOT TOUCH this money for anything except a full blown emergency! No, Christmas is not an emergency.
I was once a non-believer in accumulating an emergency fund. I figured that if the worst happened and I was really strapped for cash, I would just have to pull out the old credit card (dust it off) and live off it temporarily. But now that I have drank enough debt-free kool-aid, I am a believer in having a fully-funded emergency fund available as MY BAIL-OUT. I've seen the light at the other end of the tunnel and no, it's not from the locomotive coming towards me.
How Much Emergency Fund Do I Need? Transform Debt to Wealth.
Subscribe to:
Post Comments (Atom)
2 comments:
Good post! Have you noticed how the financial experts disagree as to how much of an EF you should have? I've seen most recommendations ranging from 3 months, to a full year. Some "experts" have even bumped up their recommendations considering the fact that, when laid off, the average american takes something like 9 months to find another job lately. ("in this economy" - are you sick & tired of hearing that phrase lately, or what?) We've got 9 months of "required expenses" in our EF. I've got ours broken down into "required expenses/bills" and "optional expenses," realizing, like you, that we can eliminate certain expenses if we need to. In the "optional" column, we have one cell phone bill, $200 of the grocery bill (family of 5), the extra mortgage payment we make each month, IRA contributions, and $400 of other items (but not church giving - that stays in the required column!). Placing the IRA funding in the optional column bugs me. I would never want to stop contributing the full amount to our IRAs, but realize that, if faced with a true emergency, we might cut back on that and revisit our retirement plans when/if emergency is over. What are your thoughts on retirement contributions? Make them "required" or keep them "optional"?
We have, however, decided to take $3,200 from the EF to pay off the car this month, since there are only 9 months left on our car payment. Why keep the car payment when we've already got the money sitting in the EF that's been designated for the car payment should we find ourselves in an emergency? ;) We've decided several times before that we were going to pay it off earlier, but each time we said "OK, pay off the car with the next car payment," we had a true "mini-emergency" come up before the next car payment (like a $1,000 plumbing bill!). So I started to think we were jinxing ourselves every time we said "hey, let's pay off the car this month!" I know, that's silly...but still.... Well, now that we are down to the 9 month mark on the car payment, we have no excuse!
Now - on to the mortgage, which is now below $58K and at least two-thirds of each payment we make is now applied to principal (not interest!) - woohoo! We get to watch that mortgage balance drop like our 401K/IRAs did in 2008! hehe - bad joke, but sometimes you have no other choice than to find the humor in the situation ;) that year sucked, eh?
I love reading your stuff - will try not to stay gone for so long again ;)
Great comment! I will make this a new post. I think retirement contributions would be optional since in a dire emergency I would not contribute.
Post a Comment