Emergency Funds: I’ve Changed My Strategy

A handful of people will remember my post on why I, and people in similar situations as myself, didn’t need an emergency fund. I am not going to disagree with myself, however, I have had a change in my situation since I wrote that a bunch of months back; I bought a new car.

There is a lot to be said for having an emergency fund (which I look at as a “you’ve been laid off” or “someone took a blowtorch to your house” fund), and I didn’t feel the need for one until my car payments kicked in this month. I changed the name of my “new car” savings account to “emergency fund” on ING, and dumped a few thousand dollars in there, giving me about one month of spending, saving and investing (or about 7 weeks of just spending). That’s not bad, but I would like to build it up to 6 months of expenses. That of course will take time.

Why I Now Have an Emergency Fund

The change in my philosophy is purely emotional. I doubt I will need an emergency fund, but with the new car, I fear a day when I can’t afford rent or my car payment. Knowing it’s not likely to happen doesn’t mean I don’t think and feel that it’s smart to have one of these “oh shit!” funds

How Do I Build My Emergency Fund?

The next question for me is how much do I put into the fund each month in order to reach that 6 month goal?  Right now I am going to put $100 a month in there.  At that rate it will take years, in fact, the better part of a decade to build up to my six month goal.  I feel like I should ramp that up a bit, but I am stretched pretty thin with where the my money is being allocated (investments, savings, food, rent, etc.).  Slow and steady is the approach I am going to go with for now, however I reserve the right to alter this saving philosophy whenever I see fit.  Interestingly, Mrs. Micah wrote about this very issue (saving fast or saving slow) in her article for today.  You all should give it a gander.

Where does funding an emergency fund fall on the list of priorities for everyone else?  Should I fund this faster than my trip to Rome I was hoping to take in two years?  Should I focus skip my Roth IRA next year to stack the fund? (Probably a really dumb idea at the age of 25). Let me know your thoughts.

10 Responses to Emergency Funds: I’ve Changed My Strategy
  1. Peter
    October 19, 2009 | 7:20 am

    While I doubt we’ll have to use our emergency fund as well – that’s what it’s there for – for an unexpected emergency. Emergencies are rarely expected and rarely come at a convenient time.

    We were thankful to have a good emergency fund when my healthy 27 year old wife had a freak blood clot that put her in the hospital for a month, and caused over 250k in medical bills.

    We were blessed in that we had a good emergency fund that paid for our insurance deductibles and costs – and we had good health insurance.

    So while it may be a good emotional choice to build your emergency fund – and you may not feel like you need it – I have to say that I think it is a great financial choice as well because you’re insuring against future problems that could cause debt, foreclosure, bankruptcy or worse.

  2. Mrs. Micah
    October 19, 2009 | 7:51 am

    I think that given your change in situation to having a car payment, it makes a lot of sense that you’re working on an emergency fund. The biggest problem with secured debt like houses is the likelihood that the lender won’t work with you if you’re in a transition period where you can’t make 4 months of payments (whereas with student loans you may get a short-term unemployment reprieve).

    Now that we don’t have a car-payment, we can make our old fund stretch farther.

  3. Matt Kelly
    October 19, 2009 | 8:03 am

    I place the 3 – 6 month emergency fund in priority right after paying off all non-mortgage debt.

    Try starting with a $1000 emergency fund. Sell stuff do whatever it takes to get there and then start paying off debt. After your debt is paid off use the same intensity to grow your $1000 emergency fund to equal 3 – 6 months of living expenses.

    Nice work getting the emergency fund started.

    Matt

  4. Matt Jabs
    October 19, 2009 | 8:24 am

    You know what will make you completely change your view on EF? Getting married.

    Women are hardwired to value and be smarter about “security” than men are. They are usually prepared much better than we males who just like to throw caution to the wind. Our EF gives my wife an incredible amount of financial peace – and because marriage is a union of two to form a better one – I listened, and she was right.

    Also, a lot of Americans have at least one credit card “just in case of an emergency.” Why not build your own EF and just use that instead?

    Cheers!

  5. RainyDaySaver
    October 19, 2009 | 8:39 am

    I definitely advocate an emergency fund. Better to fund one now while you’re a renter, because I think of it as a necessity once there’s a mortgage.

    @Matt Jabs: I know a few women who also tend to throw caution to the wind when it comes to finances, security be damned! Although marriage did seem to make a few take a long, hard look at their spending/saving habits.

  6. Evolution Of Wealth
    October 19, 2009 | 8:51 am

    I don’t always like to bring this up but if you are funding a Roth IRA, then you can access the contributions in that account at any time without any penalties. This could in fact act as your emergency fund for you in some ways. Keep in mind that depending on your holdings it will take a little longer to access this money than a regular savings account.
    I do think that an emergency fund is a very important piece to the financial puzzle and commend you for starting one. However, when money is tight it is important to speed up the velocity of what you have by make the money you have work in multiple ways.

  7. Financial Samurai
    October 20, 2009 | 1:33 pm

    Matt – Good one on the marriage part. I feel responsible for taking care of my wife forever, and that is something I don’t take lightly!

    Brian – Good chatting today buddy. Sounds like a good goal to have. I know you will save it up, and do good with it.

    Best

  8. Shawanda
    October 20, 2009 | 4:01 pm

    I’d pull back on the investing and get the 6-month emergency fund established first. Being that you’re a 25-year old man, I wouldn’t be surprised if your investments are extremely volatile. If there was an emergency, you wouldn’t want to be forced to sell and lock in losses during a down market (or I guess you would).

    Either way, glad to see you’ve come around.

  9. Millionaire Acts
    November 4, 2009 | 8:37 am

    As for me, I built my emergency fund by paying myself first. As soon as my emergency fund gets fulfilled with the goal amount, I invest the rest of my savings in other investments such as mutual funds, trust funds and stocks.

    By the way, I wrote a similar post on emergency funds on Millionaire Acts. http://www.millionaireacts.com/1802/why-do-you-need-an-emergency-fund.html

  10. Vanessa
    July 23, 2015 | 6:27 am

    How to build credit and get top scroes at the same time (with time):Use your credit card for small things you need like food or gas.Pay in full each month.52% of Americans use cards this way.They carry the top scroes.Carrying balances is an easy way to destroy credit.You don’t want a low interest card. Why?This will only tempt you to carry balances.When you pay in full each month, you never pay interest.So let that interest (APR) be 99.9%. You’ll never pay it.You only plan it to use in emergencies?You need to set up an emergency savings account for this. Not a credit card.Again, you need to use your card to develop credit.If you don’t use it, the credit reports will show $0 balance no benefit.Use it for very small things, and pay in full, and get scroes that will amaze any future creditor

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Emergency Funds: I’ve Changed My Strategy

A handful of people will remember my post on why I, and people in similar situations as myself, didn’t need an emergency fund. I am not going to disagree with myself, however, I have had a change in my situation since I wrote that a bunch of months back; I bought a new car.

There is a lot to be said for having an emergency fund (which I look at as a “you’ve been laid off” or “someone took a blowtorch to your house” fund), and I didn’t feel the need for one until my car payments kicked in this month. I changed the name of my “new car” savings account to “emergency fund” on ING, and dumped a few thousand dollars in there, giving me about one month of spending, saving and investing (or about 7 weeks of just spending). That’s not bad, but I would like to build it up to 6 months of expenses. That of course will take time.

Why I Now Have an Emergency Fund

The change in my philosophy is purely emotional. I doubt I will need an emergency fund, but with the new car, I fear a day when I can’t afford rent or my car payment. Knowing it’s not likely to happen doesn’t mean I don’t think and feel that it’s smart to have one of these “oh shit!” funds

How Do I Build My Emergency Fund?

The next question for me is how much do I put into the fund each month in order to reach that 6 month goal?  Right now I am going to put $100 a month in there.  At that rate it will take years, in fact, the better part of a decade to build up to my six month goal.  I feel like I should ramp that up a bit, but I am stretched pretty thin with where the my money is being allocated (investments, savings, food, rent, etc.).  Slow and steady is the approach I am going to go with for now, however I reserve the right to alter this saving philosophy whenever I see fit.  Interestingly, Mrs. Micah wrote about this very issue (saving fast or saving slow) in her article for today.  You all should give it a gander.

Where does funding an emergency fund fall on the list of priorities for everyone else?  Should I fund this faster than my trip to Rome I was hoping to take in two years?  Should I focus skip my Roth IRA next year to stack the fund? (Probably a really dumb idea at the age of 25). Let me know your thoughts.

10 Responses to Emergency Funds: I’ve Changed My Strategy
  1. Peter
    October 19, 2009 | 7:20 am

    While I doubt we’ll have to use our emergency fund as well – that’s what it’s there for – for an unexpected emergency. Emergencies are rarely expected and rarely come at a convenient time.

    We were thankful to have a good emergency fund when my healthy 27 year old wife had a freak blood clot that put her in the hospital for a month, and caused over 250k in medical bills.

    We were blessed in that we had a good emergency fund that paid for our insurance deductibles and costs – and we had good health insurance.

    So while it may be a good emotional choice to build your emergency fund – and you may not feel like you need it – I have to say that I think it is a great financial choice as well because you’re insuring against future problems that could cause debt, foreclosure, bankruptcy or worse.

  2. Mrs. Micah
    October 19, 2009 | 7:51 am

    I think that given your change in situation to having a car payment, it makes a lot of sense that you’re working on an emergency fund. The biggest problem with secured debt like houses is the likelihood that the lender won’t work with you if you’re in a transition period where you can’t make 4 months of payments (whereas with student loans you may get a short-term unemployment reprieve).

    Now that we don’t have a car-payment, we can make our old fund stretch farther.

  3. Matt Kelly
    October 19, 2009 | 8:03 am

    I place the 3 – 6 month emergency fund in priority right after paying off all non-mortgage debt.

    Try starting with a $1000 emergency fund. Sell stuff do whatever it takes to get there and then start paying off debt. After your debt is paid off use the same intensity to grow your $1000 emergency fund to equal 3 – 6 months of living expenses.

    Nice work getting the emergency fund started.

    Matt

  4. Matt Jabs
    October 19, 2009 | 8:24 am

    You know what will make you completely change your view on EF? Getting married.

    Women are hardwired to value and be smarter about “security” than men are. They are usually prepared much better than we males who just like to throw caution to the wind. Our EF gives my wife an incredible amount of financial peace – and because marriage is a union of two to form a better one – I listened, and she was right.

    Also, a lot of Americans have at least one credit card “just in case of an emergency.” Why not build your own EF and just use that instead?

    Cheers!

  5. RainyDaySaver
    October 19, 2009 | 8:39 am

    I definitely advocate an emergency fund. Better to fund one now while you’re a renter, because I think of it as a necessity once there’s a mortgage.

    @Matt Jabs: I know a few women who also tend to throw caution to the wind when it comes to finances, security be damned! Although marriage did seem to make a few take a long, hard look at their spending/saving habits.

  6. Evolution Of Wealth
    October 19, 2009 | 8:51 am

    I don’t always like to bring this up but if you are funding a Roth IRA, then you can access the contributions in that account at any time without any penalties. This could in fact act as your emergency fund for you in some ways. Keep in mind that depending on your holdings it will take a little longer to access this money than a regular savings account.
    I do think that an emergency fund is a very important piece to the financial puzzle and commend you for starting one. However, when money is tight it is important to speed up the velocity of what you have by make the money you have work in multiple ways.

  7. Financial Samurai
    October 20, 2009 | 1:33 pm

    Matt – Good one on the marriage part. I feel responsible for taking care of my wife forever, and that is something I don’t take lightly!

    Brian – Good chatting today buddy. Sounds like a good goal to have. I know you will save it up, and do good with it.

    Best

  8. Shawanda
    October 20, 2009 | 4:01 pm

    I’d pull back on the investing and get the 6-month emergency fund established first. Being that you’re a 25-year old man, I wouldn’t be surprised if your investments are extremely volatile. If there was an emergency, you wouldn’t want to be forced to sell and lock in losses during a down market (or I guess you would).

    Either way, glad to see you’ve come around.

  9. Millionaire Acts
    November 4, 2009 | 8:37 am

    As for me, I built my emergency fund by paying myself first. As soon as my emergency fund gets fulfilled with the goal amount, I invest the rest of my savings in other investments such as mutual funds, trust funds and stocks.

    By the way, I wrote a similar post on emergency funds on Millionaire Acts. http://www.millionaireacts.com/1802/why-do-you-need-an-emergency-fund.html

  10. Vanessa
    July 23, 2015 | 6:27 am

    How to build credit and get top scroes at the same time (with time):Use your credit card for small things you need like food or gas.Pay in full each month.52% of Americans use cards this way.They carry the top scroes.Carrying balances is an easy way to destroy credit.You don’t want a low interest card. Why?This will only tempt you to carry balances.When you pay in full each month, you never pay interest.So let that interest (APR) be 99.9%. You’ll never pay it.You only plan it to use in emergencies?You need to set up an emergency savings account for this. Not a credit card.Again, you need to use your card to develop credit.If you don’t use it, the credit reports will show $0 balance no benefit.Use it for very small things, and pay in full, and get scroes that will amaze any future creditor

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