Previous posts on this blog have talked about saving for retirement and how to start investing in stocks. However, there was something left out in the middle of those two topics. An emergency fund. What’s that? It’s exactly what it sounds like. A fund exclusively for emergencies not to be touched for anything else. That’s what exclusive means. Call it what you want. You have to have it.
How much should you have in this emergency fund? That depends. Most financial experts advise between 3 – 6 months of expenses. If you’re single with no kids and just yourself to take care of, you’re likely set with at least 3 months of expenses. However, if you have dependents or a job without a steady income, then you’re better suited with 6 months. Your emergency fund is a buffer that can be used for:
- If you get laid off at your job and have no income, you don’t have to take a job you don’t want in order to support yourself.
- In the tragic case of a loved one passing away, you have to book an immediate and expensive last minute flight as well as take time off work.
- Your car breaks down and it could cost $1,000 to fix.
- Home repairs. Water heaters seem to always blow at the wrong time and are $500+ to replace.
- Medical bills are not cheap, especially if you don’t have insurance. Even if you do, there could be high deductibles.
There are many more scenarios that require you to have this money saved. You know your own life best so think about how much you would need to cover your ass if the worst happened.
Don’t Sleep on Retirement
While your emergency fund is crucial, saving for retirement is just as necessary. If you have an employer that matches a certain percentage of your contributions to your 401(k), at least contribute what they will match. If they say we’ll match up to 5% of what you put in, then put no less than 5% in. This is the only free money in investing.
If your employer doesn’t match your 401(k) or 403(b), consider a Roth IRA. This may seem like a lot to save for all at once, but you will be much happier you started saving for retirement earlier due to the compounding interest you gain.
There are certain expenses you can’t cut out of your life no matter what. These would include:
- Rent or Mortgage payments
- If you have a mortgage, you’re in it for the long haul. If money’s tight, use AirBnB to rent out an extra room.
- If you rent, you’re likely in a lease which can be expensive to break. Rent is due once a month, so make sure you have the funds to pay it.
- If you’re fortunate enough to be month to month, you could be off the hook within 30 days as long as you give notice! Then you can move somewhere cheaper or back with your parents if you have to.
- You have to keep the lights on and the water running.
- Unplugging chords when you leave home, taking shorter showers, and not running the dishwasher are great ways lower these costs.
- Eating is essential to living if you didn’t know.
- What’s not essential is eating out at restaurants and getting brunch every weekend.
- Buying groceries and cooking meals will obviously save you $$. No new revelations here.
What You Can Cut
We went over a few of these already, but if you find yourself in a situation where you have to access your emergency fund, there has to be some necessities that aren’t actually necessities. I know… I know… HBO and Game of Thrones may seem like a necessity, but cable companies charge $15 a month for this service. You may know someone with an account and use HBO GO to watch it for free. Cable TV is really an expense that you do not need. It’s one of the most expensive monthly bills and is a big time waster.
Another bill that is probably too inflated is your cell phone bill. You’ve been told that Verizon and AT&T are the best so they get away with charging the most. There’s so much competition in the wireless industry that switching to T-Mobile or even Metro PCS could likely cut your bill significantly.
This is obvious, but spending money on drinking at the bars is a clear unnecessary expense. If you really have to drink to wind down, go to the grocery store and spend 1/5 the price.
Where to Store Your Emergency Fund
Under your mattress? In a vaulted safe? You’ve figured out what expenses you can live without so figuring out where to keep your money shouldn’t be too difficult. Not being able to access the money right when you need it is not ideal. However, you want it just enough out of arm’s length so you don’t spend it on an impulse purchase. Here are some strategies:
- High Yield Savings Accounts – Most banks have them. They pick up more interest than a traditional savings account, meaning they make you more money.
- Separate Savings Account – Aside from your regular savings which you use to save for your short-term goals, this account will be labeled “Emergency” so you know never to touch it.
- Money Market Fund – If you have a brokerage account through Vanguard, Charles Schwab, TD Ameritrade or anywhere else, you can open a money market account. You’re paying $1 a share for very low risk short term investments. They’re as good as cash but they’ll garner more interest than any savings account. You might as well make a little money while your cash is stored away.
Importance of Saving
Saving is tough. It’s not going to happen all at once, but if you treat contributions to your emergency fund as an expense like paying your insurance and bills, then it will be automatic. You can set up automatic transfers from your checking account each month so saving is on auto-pilot. Check out services like Mint that track your budget and keep you in line toward saving for your goals. Be careful. It’s a reality check to see how much you really spend.
Emergency funds are another form of insurance for the surprises in life we can’t avoid. You never expect them, but you’re glad you have back-up plans in place to protect you.