SAVINGS

Emergency Fund

An emergency fund is the most important thing you need to think about as it is your insurance to help you deal with whatever life throws at you financially.  This is what helps keep Murphy away.  (Murphy’s Law – “If something can go wrong, it will, and usually at the worst time.”)

Never use the Emergency Fund without first AGREEING ON, PRAYING ON, and SLEEPING ON the decision first.  (Dave Ramsey – Total Money Makeover book)

• Dave Ramsey suggests having $1,000 cash saved for your cash emergency fund, then after all debts are paid off (everything except your mortgage), he suggests then saving to have a fully-funded emergency fund of at least 3 to 6 months.

• Jaspreet Singh from Minority Mindset, suggests having $2,000 cash saved. He says Dave Ramsey came up with $1,000 a couple of decades ago, and that $1,000 doesn’t have the same buying power today, so he suggests having $2,000 for your cash emergency fund.

• Kelly from Freedom in a Budget suggests having at least enough to cover 1-months’ worth of expenses saved for your first emergency fund, then another 3 to 6 months saved for a fully-funded emergency fund.

• The Money Guy Show suggests the first step should be to make sure you have enough cash to cover your deductibles/copays (Health, Auto, & Home), then after you get your employer match on your retirement and pay off your high-interest debt, you should then save for your 3 to 6 months emergency reserve.

Choosing if you need 3 or 6 months or more in an emergency fund depends on your employment and occupation, how long will it take you to replace your income, and how close you are to retirement.

• 3 months is probably okay if you are in a high-demand position, and you feel like you could find another job quickly or quickly replace your lost income if needed.

• 6 months is probably better if you feel it could take a little longer to replace your income if you lost your main source of income.

• 18-36 months is better if you are nearing retirement. This will help you transition into retirement as it can sometimes take a while to start drawing your retirement income, and it could help cover you if the market is down when you retire leading you to not be able to withdraw your retirement fund quite yet.

You should also consider any other things you might need within the next 3-5 years like if you are buying any houses or cars, or if you are funding any weddings, trips, etc. in a cash/savings account.  They say you don’t want this money to be in investments as the market could be down when you need to use this money.

Come back to reevaluate this every few years. For most of us, our lifestyle tends to expand. We began making more money, expanding our families, and having more responsibilities. Be sure to reevaluate the amount of your emergency fund to ensure it will still be sufficient. If it does not pass, then stop what you are doing, and focus on increasing your emergency fund to your required amount. Then move on to your other financial steps.

Most say to aim to save at least 20-25% of gross income.

Where this money should be saved

Your first step (either $1,000-$2,000, 1-months’ worth of expenses, or deductibles/copays covered) should probably be in cash or at least in a savings account that you can easily access should you need the money right away. 

Most say your fully-funded emergency fund (your 3-6 months, or 18-36 if nearing retirement) should be in a high yield savings account or money market account as this is not the money you are using to get wealthy. Just like you buy insurance hoping you will never have to use it, this money is like insurance, set aside hoping you will never have to use it, but you will be glad you have it if you need it. Most suggest not investing this money because when unemployment goes up, stock prices usually go down, and that is not a time when you want to sell your stocks.

If you use savings accounts, consider diversifying your banks into small credit unions, bigger banks, and online banks. Some banks could suffer problems during recessionary times making it harder to access your money. Having multiple banks can help minimize the problems you could run into if your bank suffered any problems. Also, be sure to log into your accounts frequently to ensure your balances are correct.

Others, however, suggest that you shouldn’t keep as much cash in your emergency fund, because you could be tempted to spend it on non-emergency stuff.  They suggest keeping your emergency fund in something like the S&P or total stock market index fund as it should pain you to take that money out, kind of like breaking glass or a piggy bank.  However, if you do this, they say to only think of the value of these investments as half or 50% of the total.  (For example, if you have $10,000 invested, think of it as only having a $5,000 value.)  This could make you work harder to invest more, and if the markets are ever down, you will still be okay because you have figured that in.

Something to consider is the stock market dropped almost 90% during the Great Depression, and it took about 20 years for it to fully recover.  Also, there have been times in our recent history when trading was halted for one reason or another, so it could still be a good idea to make sure this is not money you will need immediate access to, and you should still have a cash emergency fund and some savings in a high yield savings account that you can easily get to if needed in an emergency.

Roth IRA’s are great tax advantage vehicles, but they might not be the best place to park your emergency fund either. If you had to take a significant amount out of your Roth IRA for an emergency, you could be limited on the amount you can re-deposit back into your Roth IRA due to the yearly contribution limits.

**Do not let lifestyle creep happen. When you receive a raise, save that extra money. Do not condition yourself to live on that extra money. You are already living without it, save and invest it. This can help you reach your F.I.R.E. number faster.

Using Investments as an Emergency Fund

Several financial gurus say to never have your emergency fund tied up in anything else as you might not be able to get to it when you need it, however, others suggest that you shouldn’t keep as much cash in your emergency fund, because you could be tempted to spend it on non-emergency stuff.  They suggest keeping your emergency fund in something like the S&P or total stock market index fund as it should pain you to take that money out, kind of like breaking glass or a piggy bank.  However, if you do this, it’s good to only think of the value of these investments as half or 50% of the total.  (For example, if you have $10,000 invested, think of it as only having $5,000 in it.)  This can make you work harder to invest more, and if the markets are ever down, you will still be okay because you have figured that in.

• Something to consider is the stock market dropped almost 90% during the Great Depression, and it took about 20 years for it to fully recover.  Also, there have been times during our recent history when trading has been halted for one reason or another.

• It could still be a good idea to make sure this is not money you will need immediate access to, and still have a cash emergency fund, and some savings in an account that you can easily get access to if needed in an emergency

The wealthy only use debt for things that will bring in income (ie: purchasing property for rentals), and smart investors do not overleverage themselves.  There have been plenty of millionaires that have lost all their wealth due to overleveraging.  Be sure to prioritize your money wisely so as to not incur so much debt that it becomes unprofitable.  A slow continuous wealth growth is likely to be more lasting than an instant / temporary influx.

Steps To Help Build/Rebuild Your Emergency Fund

If you had to use your emergency fund, stop where you are, and go back to rebuild your emergency fund.  Remember how thankful you were or how thankful you will be for having an emergency fund when you need it?  Sometimes life just sucks, and things happen, and when it does pick yourself back up, go back and rebuild that emergency fund, and move on.

Some helpful tips when building/rebuilding your emergency fund:

1.    Back off your lifestyle – This is only temporary.  This can help you gain extra savings to build your emergency fund up or back up more quickly.

2.    Back off your 401k or investments – Again, this is only temporary.  If backing off your lifestyle isn’t enough to build or rebuild your emergency fund fast enough, you may want to consider stopping your investments until your emergency fund is built up where it should be.  IF Murphy comes, you will be thankful you prioritized your emergency fund first.

Your emergency fund should be reevaluated every few years to ensure it will still be sufficient. For most of us, our lifestyle tends to expand. We began making more money, expanding our families, and having more responsibilities. If the amount of your emergency fund does not pass, then stop what you are doing, and focus on increasing your emergency fund to your required amount. Then you can move on to your other financial steps.

Checkbook Cushions

We all make mistakes, and having a cushion or set amount that you plan to never go below in your checking account can help ensure you do not bounce a check or payment.  This is an amount that you write out (but not move or spend) so you forget that it’s there and won’t be tempted to spend it.  (However, remember the cushion’s amount when it comes to balancing your checkbook, so you can balance correctly.)

Some say a few hundred for this is fine for them, some use $1000 for this, and others say they make their checkbook cushions the amount of one month’s worth of expenses for them.  Do what makes you feel comfortable.

Using checkbook rounding as discussed below under Money Savings Challenges might be an easy way to build up your cushions amount.

7 Accounts – suggested to keep your money organized

Jordan Page from FunCheapOrFree

1.      Family savings – Leave at least 3 months’ living expenses in this account.  Put in 10% of your income every month until you reach your desired amount.

2.      Emergency savings – Have at least 6-12 months of living expenses in this account.  Put in 10% of your income every month until you reach this desired amount.

3.      HSA (Health Savings Account) or regular savings account for health expenses.

4.      Family checking account – Bills are paid from here.  Do not leave a lot of extras here because if there is extra money, it should be transferred to savings.

5.      Husband’s checking account

6.      Wife’s checking account

7.      Slush fund – Fun Money!

Money Savings Challenges – A few ideas to help you save extra money

No Spend Week/Month – Set times when you do NO extra spending.  This, however, can backfire and make you want to spend more during the times you can spend, so be mindful.

Weather Challenge – Pick a day of the week, and whatever the day's high or low temperature is, save that amount.

Dime or $5 Challenge – Every time you get a dime or $5 or any other denomination you would like to choose, you put it into an empty bottle or box to save.

Themed Month Challenge – Choose one thing to cut out, and transfer that amount you would have spent into your savings.  Examples could include eating out, buying clothes (don’t do this at back-to-school season), tools, Starbucks, Amazon shopping, Target $1 spot, ex.)

Checkbook Round-Up Savings – This is the same idea as a change jar, just used with your checking account.  Round up anything you spend from your checking account (checks or debit card) to the nearest dollar or nearest $5 amount.  However, when you are doing this, make sure you are tracking these amounts separately so you can still balance your checkbook at the end of every month – VERY IMPORTANT.  When I hit a certain amount of Round-up Savings, I will then transfer the money to a savings account.

Sinking Funds – A very beneficial budgeting tool!

These are funds that you set aside for a specific planned purpose like saving for Christmas, an upcoming trip, a house or new car, a wedding, or even small stuff like auto/home repairs or paying bills that only come up once or a few times a year (example: auto insurance or subscriptions). 

Including these in your budget can help ensure you don’t have to use your emergency fund for events that are planned as your emergency fund should be for unplanned emergencies.  Christmas gifts are not an emergency. 

Two types of sinking funds:

Ones with a due date for when you need the money

Example: Christmas, trips, wedding, a new car or house funds, or for bills due once or a few times a year like auto insurance payments.  For these, just take the needed amount and divide by the number of months you have to save for it.  That will give you the amount you need to set aside each month for these funds.

Ones with no due date that are ongoing.

Example: funds set aside for house or auto repairs or health care expenses.  For these funds, you usually set aside a little money each month for things that will come up here and there, but there is no specific due date.

Best Place to Save Your Sinking Funds

For anything you are saving for coming up in less than 5 years, you should save your money in a cash savings or a money market account.  Find a good online bank that is FDIC insured with good interest rates. 

For anything you are planning for over 5 years from now, you can look into investing that money. 

If on the borderline of 5 years, you could do part one and part the other, but make sure you have what you really need in the savings or money market accounts just in case the market is down when you need your money, and you can’t take out your investments without losing a lot of money.  Then you can take the other part of that money out when the market is back up.

 Example: If saving for a house, and you are on the borderline of planning to buy in 5 years, make sure you have what you will need for the down payment in your savings or money market accounts just in case the market is down when you buy.  You can use the savings for the down payment and then take your investments out later to pay more of the house off when the market is back up, if it was down when you bought.