Emergency Fund

The below article is one that I wrote at my previous blog, which suggested building an emergency fund.  This article was written on June 3, 2006.  Right around this time, I opened up an online savings account with Emigrant Direct, however, soon after I transferred this account to E*Trade where I now house 1) emergency complete savings account, 2) stock trading account, and 3) Roth IRA.

Due to the current financial crisis that the world is going through, this topic is probably the most important one of all.  However, I don’t believe that simply “starting with $1,500, paying off debt, and then saving 3 – 6 months worth of expenses” is enough anymore (and probably never was).  What if you lost your job like the hundreds of thousands of people out there who have in the past months?  Would you be prepared?  Would you be able to pay the mortgage?  Would you be able to put gas in the car?  Would you be able to put food on the table?  These are just some of the questions that you need to ask yourself when analyzing your personal emergency fund.  Is 3 months really enough?  I say – No!  If you are one of the many individuals out there right now who have lost your job, how long would it take you to find a new one?  1 week?  1 month?  1 year?  Who really knows?  If you are in a recession-proof job (none are totally recession proof) maybe you could obtain a new job fairly quickly, but how many employers are really hiring right now?  The problem with the mindset of people when they are thinking about building their emergency fund is that they never plan for the worst; they always plan for the best.  Well, we all know that the economy can turn on a dime, and you need to ask yourself “am I ready for the next recession?”  Is my personal financial statement recession-proof?  One of the things I hope to teach readers of mikefanelli.com is how to recession-proof your personal financial statement, by doing various things that you would hear the Fortune 500 companies trying to do as well.  Many do not plan for the worst, and end up begging the government for money to help them out in a time of need, stating that they are too big to fail, and too many jobs will be lost if they fail.  The management of these companies has failed, just as you have if you fail to plan appropriately with your emergency fund!

The new me suggests an emergency fund of 8 months of expenses.  When you calculate your monthly expenses don’t simply calculate the recurring monthly payments such as mortgage, insurance, car, etc.  Also be sure to include groceries, eating out, house supplies, etc.  Be honest with yourself…you cannot simply live on your mortgage, car, insurance…you must eat, be clothed, and live!  So, if your total monthly expenses come to $4,000, for instance, I would recommend $32,000 stashed away in an online savings account which will get you approx. 3% interest (today), which you will not touch, unless there is an emergency (job loss, etc.).  Another suggestion (I believe Suze Orman believes this as well) is to also separate any near-term large expenses into an account similar (but separate) to the emergency fund.  Examples of these items would be college tuition, house down payment, auto down payment, vacation/trips, etc.  Do not have savings for these types of items in the stock market.  There is no point.  If you need the cash within the next year (or couple years really) you cannot play in the stock market.  UNLESS, you are a professional, or do your homework and truly believe that you can time the market (90% of investors cannot).

If you are confused or don’t know where to start, please contact me and we will find you help.  Alternatively, I will be including downloadable forms, such as budget, emergency fund calculator, home buying calculator, etc., all in MS Excel format, on this site, at Downloadable Forms.

Conclusion:  Be safe, be conservative, be smart, educate yourself, and have fun!

Original Article:

This is probably the most talked about personal finance topic of them all, other than debt pay-down. I am a huge believer of building an emergency fund. Most personal finance experts, including Dave Ramsey, say that you should have 3 – 6 months of expenses stashed away in an emergency fund, NOT to be used except for emergencies. From my perspective, this account should not be your traditional savings account. You should separate this emergency fund into its own account, not to be touched except for various emergencies such as, but not limited to, job loss, unexpected car maintenance, unexpected medical bills, or a leaky roof.

I am currently in the process of changing where I house my emergency fund, to Emigrant Direct, taking advantage of a 4.65% interest rate with no fees! These online savings accounts such as Emigrant Direct, ING, HSBC, etc. are a great place to house an emergency fund, because usually this account is not tied to an ATM card (more difficult to withdraw the money), and the money will work for you with the great interest rates that each company is currently providing.

I would recommend starting with an emergency fund of $1,500. Then I would pay off all high-interest debt, such as credit card debt. After all credit card debt is paid off, get aggressive and save up to 3 – 6 months of expenses, so any emergency will seem like a walk in the park! I wouldn’t start investing in stocks or mutual funds until this emergency account is fully-funded.

Bankrate.com has a great article on “22 ways to build an emergency fund.”

Bankrate.com also has an article on “Sizing up an emergency fund.”