Emergency Fund – What should you do with it????

Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.

-Will Rogers
Photo by Fabian Blank on Unsplash

You know that the world often throws you curve balls, so you have worked hard to sock some money away for those inevitable “emergencies.”   Maybe you diligently save a bit out of each paycheck, or maybe you sold some of your extra “stuff” to fund the account.  No matter how you got here, you have created a wonderful cushion to soften any landings you might have in the future. GOOD WORK!!  

Depending on the amount you have, and on your plans for what will happen next, you have some options on how to hold on to that money.

  • Cash:  While it may seem like cash is not risky, there are risks to holding money.  If you physically keep the money on your property, there is the risk of fire or burglary.  If you keep the money in a checking account at a local bank, you are mostly safe from theft and fire, but you are still at risk of bank fees corroding your funds, and, over a longer term, losing the value of your money due to inflation. (If inflation rises 3%, and your funds have only earned a measly 0.25% in a bank savings account, you have suffered a loss in value of your money because you do not have the buying power you had when you deposited the funds.)
  • High-yield savings account:  If you are pleased with your accumulation and know that you can keep your account full to this level, but you are not prepared to continue saving for any other mid- or long-term goals at this point, you will probably get the most security, and a tiny bit of monthly interest, by parking your funds in an online High-Yield savings account. (try SallieMae Bank and do some research to see who has the best current rates.)  Right now, interest rates are on the rise, so it is worth doing a bit of research to see where you can get the best rates. You are probably going to keep inflation losses at bay for the most part with this type of account.
  • Invest:  If you are fortunate enough to now have the “saving bug” in your ear, encouraging you to keep building that savings account up with every spare penny you can find, then you may want to take some of the funds you are accumulating and try to get a bit of more substantial growth out of it.  Let’s say you initially set out to accumulate $1,000 in an emergency fund. After three months or so, you realize that it wasn’t all that difficult to build up the funds and you decided to add another $1,000 in the next few months.   As you keep growing this fund, you may decide that letting it earn 3% interest in the High-Yield account just doesn’t seem like enough. Surely, you don’t want to lose your emergency fund in the stock market, but at some point, as you keep growing these funds, you may exceed what you think is a reasonable amount of emergency money for your lifestyle.

 This is the tipping point where you could choose to invest in the stock market in a conservative way, like by investing in a good mutual fund that tracks a large part of the market (try Vanguard VTSAX or Schwab SWPPX*).  You want to make sure that you are protecting yourself from taxes on your earnings, so make sure you put your money in a tax-sheltered Roth IRA account if you qualify to open one.  This type of account allows you to invest some of that “extra” emergency money and will not penalize you for taking the money back out if you need to use it for something that comes up. With the tax shelter of a Roth IRA, any earnings that you make in the stock market on these funds have to remain in the account until retirement age or other qualifying factor, so that you don’t get penalized for using them early.  It is a great way to dip your toe into investing.  Stay away from stock picking.  If you have so much “extra money” lying around that you want to try risky trading or stock picking, you will have to look elsewhere for advice… this author has never experienced “extra money” and has never been willing to lose even a penny on a risky bet…

*There is a lot to learn about investing! But these two companies have low/no fees and are a low risk way of getting started… Vanguard has a higher minimum ($3,000 for most funds at the time of this article) while Schwab allows you to open an account with just $1. Read as much as you can about investing as you start this journey! Some excellent sources are MMM and Bogleheads sites.

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Habits to Learn – Part 2

“The biggest mistake is not learning the habit of saving properly… Do not save what is left after spending; instead spend what is left after saving.”

-Warren Buffet

This is the next step towards your independence.  The first steps were in Habits to Learn –Part 1.   In that step, you made sure you had a few dollars in your pocket at all times so you can avoid bank fees and you established a checking and savings account so you can start making progress towards your emergency fund. 

It is time to fill up that emergency fund to help you get through standard “emergencies” that arise.  There are a lot of different ways to start adding funds, but first it is important to determine a goal so that you can measure your progress towards it.  How much you need to set aside depends on your situation.  If you are married with a dual income household with a spare room that you rent out for extra income, you will need a different type of emergency fund than if you are a single parent with one income and young kids relying on you.  In the first case, if there is a loss of income from one party, it is likely that you can cut costs and rely on the other income until a new job can be found.  There isn’t a great need for hearty emergency fund, but a small one for car troubles and the like is still necessary.  In the second case, it would be better to have a bigger fund.  With little ones relying on you for healthy meals and a feeling of normalcy, and with only one income to rely on, it is important to really buckle down and put your mind to having a significant fund.   These are two extremes, and your situation will likely fall between them somewhere.  

One rule of thumb is to stock your e-fund with 6 months of expenses.  This may be a daunting task that could make you feel like you will never reach the goal.  I suggest, instead, start small.  Get $500 into that e-fund as quickly as possible.   It isn’t as hard to do as you might expect. 

  • Decide on a set amount that you can take from each pay check and send directly to your savings account.  Set up a direct transfer from your paycheck through your HR department at work if possible.  If not, then set up an automatic withdraw from your checking account. Start with at least $10 per pay period and get the funds into that savings. Don’t touch them for any reason! This isn’t for food or for a night out at a restaurant.  It is an emergency only fund. Discipline yourself to use it in that way only. 
  • Now, take a look around your house and see if you have any items that are not being put to good use.  There are a number of internet sites that allow you to list your items for sale. There are many websites that will buy books straight off of your bookshelf. Using these is usually quite easy, with the sites providing you a shipping label and instructions on how to package the books so they arrive in good condition. (try BookScouter  or SellBackYourBooks.com) If you have text books,these can possibly bring a decent chunk to add straight towards that $500 goal. 
  • Take some time to meal-plan for the week, buying healthy low-cost ingredients to make your family healthy meals at home instead of paying a premium for meals out at restaurants or fast food meals (which seem cheap, but really are NOT!).  This is a fast way to save money if you normally eat out a lot.  
  • Now, take a look at your bills.  The reoccurring bills can almost ALWAYS be cut down.  Call you electric/gas company and ask them to put you on a budget plan.  Ask them if they have any advise or packages available that will help you reduce your energy usage. Some have discounted high efficiency light bulbs for a great discount. Some will send you out a free package of insulating strips to put in doorways and around light fixtures that reduce draft and energy losses.  After the electric company, contact your cable company (if you still have cable…. Everyone is cutting the cord no-a-days!)and have it CANCELLED! Even if that is difficult at this time, savings can be over a hundred dollars per month in many cases. You can find free/very cheap television entertainment with just internet access (Hulu, Netflix and the like.) Call your auto insurance company and ask them to reduce your rate.  Even if they can only find $5 in savings,take it!  Look at your other bills with this same fine-tooth-comb mindset and you may be amazed just how much you can take off of your monthly costs.  There are cell phone services like Republic Wireless, T-mobile, Cricket Wireless and others that offer acceptable services at a fraction of the cost of some of the bigger names. Even if there is a fee for cancelling your contract early, if you do the math, most of the time it is still scientifically cheaper to change to a low cost cell service company.  Do not cancel legally required coverage (like auto insurance), but cut back as much as you can.  You may find that you can add another $50-$150 per month to the e-fund just from these savings alone! 
Photo by rawpixel on Unsplash
  • At work, if reviews for raises are coming up soon, start making a list of all of the responsibilities you have currently.  Think of and write down any instances where you have saved the company money (ie. Finding correctable errors,finding better rates, arranging things in the office/warehouse that add efficiency or speed to some processes…). When you sit down to discuss your performance review and raise amount,bring this list with you and be prepared to discuss why you think you are worth more.  If your company isn’t in a position to offer a decent wage raise, they may be able to offer some other type of perk that saves you money. For example, if you find that you are using your personal cell phone for work purposes constantly, ask for the company to provide a company cell for you to use.  Then cut your personal cell phone back to the bare minimum.  Everyone goes to work to make money.  Your employer knows that just as well as you do, and if you can show them your worth, most good managers will be willing to improve your raise, even if only slightly, which builds on itself with your next percentage raise or percentage bonus you receive.

All of these things will not only accelerate your path to a full emergency fund, it will set your life up to be cheaper on the baseline.  This new “normal” cost of living will change your perspective on how much things should cost.  You may find that you would feel better with $1,000 or more in your e-fund.  Shift your goals to be what feels right for you. 

Any other suggestions, please comment!

Note: I have no affiliation or relationship with the service providers listed in this post, other than as a user or friend of a user of some of their services. These recommendations are for your research purposes only.  I do have a link to get you a discount on service from Republic Wireless if you are interested…. Join using my link and get $20 off your first bill: https://republicwireless.com/invite/988JZ1ZH