So What’s an Emergency Fund For Anyways???
At the beginning of the year, my fiancée, ready to pursue loftier goals than her current position, decided to go to law school. I was thrilled that she wanted to pursue one of her dreams, but at the same time I was more than a little nervous about going from two incomes to one amidst a full-blown recession where the term ‘job-security’ no longer existed. While we had some money set aside, I spent a few sleepless nights wondering how we would make ends meet as we were already facing student loans, car payments and saving for our wedding.
To top it all off, as we approached summer, we were faced with a new concern – the reality that we would have to relocate so she could attend the school that was the best fit for her. This meant I would be stepping into a job market that was virtually non-existent.
To make a long story short, I am counting my lucky stars that I was not only able to find a job, but find a job that allows me to share my experiences with you and help guide you on the path to financial freedom.
An often overlooked piece of financial freedom is the “emergency” fund. Most people associate this term with an account that is used if you are laid off or have a major home repair that arises unexpectedly. However, my recent experience reinforced that this is not always the case.
For anyone who has made a long-distance move (Milwaukee to Kansas City in my case), the expenses add up quickly. There are not only moving costs, but “separation” costs associated with any move. In my case, my fiancée and I had to pay rent on an apartment in Kansas City (plus a security deposit) and one in Wisconsin, as well as other unexpected expenses such as temporary health insurance and car titling/licenses.
You might be wondering if there is a general rule of thumb for how much you need to put away. The most common recommendation is three to six months of salary. In my opinion, that number is a little misleading – and a little intimidating.
An emergency fund is not intended to be a rainy day fund, but rather a source of funds to cover your necessities – food, clothing, shelter and other mandatory debt payments. For this reason, I think it is more accurate to say you need enough savings to cover three to six months of expenses, and in this economy, it might make sense to have an extra month or two.
So how do you start? I hate to bring up the term budgeting, as most people shiver upon hearing the word, but budgeting is going to be the key to your success. The first step is to determine your spending habits. Next you need to decide which areas you can comfortably cut down. For example, I try to avoid going out to lunch during the week. By bringing my lunch to work, I realized I save about $5 per day – that adds up to over $1,200 per year.
After reviewing your spending habits, you need to come up with a weekly or monthly savings goal. As you find additional areas to cut-back on, you can gradually increase the amount you save. One important thing to keep in mind is to make sure you have a realistic savings goal that you can stick to.
Once you commit to a savings goal, the next decision is figuring out where to put the money. First and foremost, this money needs to be kept separate from other accounts to eliminate the chance you unknowingly spend it. I recommend using an online savings account. These accounts offer competitive, CD-like rates, are FDIC insured, and still allow quick access to your funds. The website Bankrate.com can help you find current interest rates for online savings accounts.
I always thought an emergency fund was only for when you were laid off, had health problems, or needed to fix your house or car. This situation made me realize that the need for an emergency fund can take many different shapes. If you do not have an emergency fund yet, remember, the first step is the toughest one. If you do have an emergency fund, what strategies did you use to build it? How long could you survive on it? And what type of advice do you have for those just getting started? Please leave your comments below.
Joe McCulloch, Investment Advisor
