Once you reach a certain point in your financial life it’s time to start thinking seriously about building up that emergency fund. While it doesn’t make much sense to have a pile of money in a savings account while you have debt, once the debt is gone? What do you do with the pile of money that’s leftover? (Well, ideally of course you’ll have a little wiggle room, there are very few that will have an actual pile of money left over every month)
Here, I assume you’ve already dealt with your debt and have paid off all your consumer debt except the house. I’m also assuming that you want to continue the awesome progress you’ve made so here’s a plan to keep going and to grow toward financial independence.
The first step
Since you’ve dealt with what are usually the largest cashhogs in the average budget; payments on STUFF, you should be able to continue making those payments that you were making towards debt, but instead putting them towards building a healthy emergency fund. You’re not doing anything different, you might still feel a little broke or you might not notice it at all. The point here is trying to avoid lifestyle inflation, don’t get accustomed to having more spare cash on hand, save it instead.
Spare yourself the headache and just pretend you still have payments to make, only now you’re making the payments to yourself. It’s much easier to keep with your current budget than to have to get used to cutting into the budget once you start spending that cash. Put your former debtpayments straight into an easy to get to, very liquid account such as an online savings account with banks such as Ally and ING Direct.
But how much do you actually need?
Ignore what everybody else thinks is a good amount for you to have in your emergency fund. It doesn’t matter what anyone else think or what experts say. What matters is that 1. you have an emergency fund and 2. that your emergency fund can tide you for the period of time you think you will need it. Thinking you might lose your job? How long will it take to find a new job? Of course it’s hard to say exactly but you should have a good idea of the minimum amount of cash you need. YOU and your situation are unique and only you can decide how much money should be in your emergency fund. Some people are fine with half a year’s worth expenses in it, others strive for a nice round number like $10,000. Some others (like me!) won’t be fully satisfied until their emergency fund covers a year or hey, two years of expenses. It’s your peace of mind, how much peace of mind do you need?
And lastly,
Don’t touch it! Emergency funds are not for spending! They are for putting food on the table when its needed, for fixing your car or your furnace when they blow up. An emergency fund isn’t for going out for dinner, your emergency fund is your insurance policy against financial disaster. Separate your fund from your regular banking, don’t just stuff it in the savings account that’s listed right below your chequing; all it takes is two clicks of the mouse to transfer money so you can spend it. NO! That’s too easy. Deposit it in a seperate, free account, solely dedicated to being your peace of mind, your emergency fund, your FU money, your rainy day fund… you get the gist.
This post is in honour of my recently completed, bare-bones emergency fund which now sits at a very pretty $6,061.08. Eventually I want to have something like $10,15 maybe $20k sitting in that account but for now… this will do just fine! So, do you have an emergency fund yet, any tips for people just starting out?
Liquid (3)
@Finance_Fox (2)
Canadianbudgetbinder (2)
A Dash of This an... (1)
My emergency fund is small, and some of it consists of precious metals that are hard to spend, but easy to liquidate in case of a real emergency. This is my next mission after paying off my debt this month.
Posted by John@MarriedWithDebt | July 5, 2012, 12:30 pmI've seen you on the Kitco boards! (hope thats not creepy) just straight bullion or numis as well?
Posted by Andrea | July 5, 2012, 2:46 pmNumis only when I can make a buck. I did pretty well with the 25th Anniversary Silver Eagle set by flipping some as soon as I got them. Mainly bullion though.
Posted by John@MarriedWithDebt | July 6, 2012, 11:08 amPersonally I am more comfortable with a much smaller emergency fund. If I had too much money sitting in a savings account I would be stressing out over how little return that money is getting me. I'd rather put it into my RRSP or TFSA where I can still access it if I absolutely need to, but I am much less tempted to spend it. Really, even if I needed that money late at night or on the weekend, I could just borrow some money from my line of credit and pay far less in interest compared to the interest lost using a savings account.
Posted by Modest Money | July 5, 2012, 2:54 pmI'm still conflicted on how I really feel about RRSP's, my emergency fund is a TFSA though, having that limit to contribute/withdrawal rules is just one extra little barrier to just blowing through the money.
Posted by Andrea | July 6, 2012, 3:01 amI have an emergency fund, but I do plan on dwindling it down. It's at around $15K, and I plan on using a substantial amount to put towards debt.
Posted by Michelle | July 5, 2012, 3:01 pmThats a nice amount to have saved but yes, if you have that much (that's a nice chunk of change!) some of it is definitely better off towards debt considering the return.
Posted by Andrea | July 6, 2012, 3:04 amI have a "long term" savings account of a house payment, and then my "emergency" fund which is 1500-2000 in case of car repair or medical emergency or something. anything more would tempt me too much to spend!
Posted by queenlbee | July 5, 2012, 3:48 pmIt's not that hard not to touch it, surprisingly! I didn't expect to feel that way at all, it helps that the account is at a bank where I have no other accounts and to move the money I have to transfer it online, and then wait a day or two for it to show up. Having the self-restraint to save for a house I find much more impressive, I've never been much good at saving for big things so good job!
Posted by Andrea | July 6, 2012, 3:03 amI have about 6 months saved up should all income shut off. However, I've focused on finding income from multiple sources, which means, it would be hard to fully turn off the tap. Lately, I have been thinking of opening an IRA for additional, potential, emergency funds. That ways I have a (moderately desperate fund) should my situation warrant, but will earn me retirement income should doomsday never arrive.
Posted by myfamilyfinances | July 6, 2012, 3:24 pmI have a large emergency fund which is being built for home down payment purpose as well. I have it in interest paying saving account. It can cover almost any emergency
Posted by SB @ FPR | July 6, 2012, 9:17 pmThat's awesome! Must give you and your wife great peace of mind
Posted by Andrea | July 8, 2012, 2:03 amSince retirement, we have increased our emergency fund – to handle major issues and illnesses not covered by insurance. I have some of it in low interest accounts but put some of it into short term bond funds in a desperate attempt to get some return on it!
I heartily agree with holding back your lifestyle needs. Once you get out of debt and get your emergency fund built, then you can start saving towards that next car or the down payment on your house or your kids college or whatever – just keep rolling what you would have paid on the last thing into the next thing and pretty soon you will be rolling in money!
Posted by FamilyMoneyValues | July 7, 2012, 10:36 amYes returns aren't the best with the safest accounts, 1.8% on my savings isn't even keeping up with inflation. What is the return on your bonds? And rolling in money, heh, oh a girl can dream! Some day..
Posted by Andrea | July 8, 2012, 2:02 amI have a $2,100 emergency fund and I swear to god that number is the max for me.
Not because I want it to be, but because I can never seem to have more than that. Even if I dip into my EF, I build it back up… but only to $2,100. I want it to be $3,000, then $6,000 and eventually $10,000 but I just can't seem to make it budge even if I make a plan or budget to put more into it.
Maybe after my student loans are paid off =\
Posted by moneyaftergrad | July 8, 2012, 3:47 pmMy wife and I don't really have an emergency fund. We have money that we can take out in a heartbeat but it hasn't been labeled that. However we are investing more and trying to build on that. In the next few months we will define an emergency fund that will work for our needs.
Posted by Jai Catalano | July 9, 2012, 12:49 pmI have an extremely small emergency fund but that's because I'm still building it up. I also have a few smaller funds (medical, car, house) that could be dipped into in an emergency. This way I don't feel guilty getting brakes on my car and pulling from the emergency fund but am still contributing to both.
Posted by bogofdebt | July 9, 2012, 4:39 pmI have had an incrementally growing emergency fund over the last year. I finally hit my goal of $5000, but decided it is good to keep on growing anyway.
Posted by Eric | July 10, 2012, 3:41 pmI have an emergency fund, and think it's imperative for people to have one. I think 6 to 9 months, even up to 12 months, is a good amount to work toward. But I'm more conservative that way, and have had some time to build it.
Congrats on having one, that's great – and puts you way ahead of the average.
Posted by Squirrelers | July 10, 2012, 11:07 pm