04 Sep
Posted by: mark in: "saving money", Financingyourfamily.com, money, Saving, debt, Family, Budgeting
Say you’re like me, you own a car, and your hood release lever doesn’t work. I have several options to fix the car.
1. I can try to fix it myself and risk breaking additional things.
2. I can go into debt to have someone else fix it.
3. I can access my emergency fund.
So what do you do in this situation? Sooner or later that car’s getting paid for, so I take cash out of my emergency fund (my mechanic has a discount for cash for some reason that I won’t go into detail about here) and I pay the mechanic to fix it.
The big debates on emergency funds
First of all, most financials encourage people to have emergency funds. I am not sure if this is because they care about the people or just want a large sum of money on deposit with them. My guess is that it’s the second reason but they publicly state the first.
When you talk to financial planners though, some say to pay off your debts with the emergency fund and used the paid off (usually credit card) as a new emergency fund. Now if you’re the kind of person who freezes their credit cards in gallon bags, this is a great strategy because you have to think about whether or not it’s really an emergency. (microwaves will ruin the card so no defrosting here) You also have the satisfaction of paid-off debts, and greater freedom with current income.
Then there is the how much question. Some emergency funds are 6 months’ income. Occasionally you find one that’s a year’s income, the vast majority fall somewhere between $1,000 and 3 months’ income. My personal opinion is that you should set your own goal based on how much you seem to have emergencies. For me, very few things count for emergencies so my emergency fund is only $1000. However, my wife and I would like to have children, so we have a goal of $10,000 to use as an emergency fund in that case. $10,000 is just an arbitrary number for us though.
Where do the funds for emergency funds come from?
Right now our emergency funds are in a savings account, since it’s linked to our ATM card, but once we hit the higher interest tier on our savings, the funds will be moved into a new money market account that should pay a much higher rate of interest.
As always, we love to hear from the people who read this blog, we will happily answer questions or even debate with you. What is your opinion on emergency funds?
4 Responses
AmyL
05|Sep|2007 1We follow the Dave Ramsey suggestion of having at least a grand in savings for emergencies. The next step on the list is having the ten thousand in a money market account. Ahem. Yeah. Haven’t even attempted that one lol. We will at some point but I’m guessing that’s a few years off. We’ve been working on home improvement and family travel instead. May not agree with Dave’s plan, but I’d rather have the kids living in a house they can actually enjoy and be possessed of fond family memories. Once the house is done I’m a lot more willing to work on savings again. Is that bad?
mark
05|Sep|2007 2I don’t think that’s bad at all. You have to weigh in the quality of life that you want for your family, and if that means a nicer home now for memories later, then that’s what you’re paying for. I would be more in favor of a home than many expensive vacations. Dave Ramsey’s stuff does work, and it will get you out of debt, but so will any other concentrated effort to resolve debt issues while spending less than you earn.
AmyL
07|Sep|2007 3Excellent point about multiple programs being helpful. I’ve appreciated many of Mary Hunt’s ideas as well, especially the Freedom Account.
The vacations have been done on a budget, lol. No wild expenditures here! Even if I had the money for something like that, I don’t think I could stand the idea of spending it like crazy. Now that the dollars are mine, I don’t like to part with them.
Andrew
16|Sep|2007 4My wife and I have a $1,000 emergency fund in a high-yield savings account that lets us write checks (2 or 3/month I think) from it or access the money from an ATM. The person we got our financial advice from (Dave Ramsey, who I’m sure you’ve heard of) suggests this amount and it makes sense to my wife and I. I have great health insurance from my company and both my homeowners policy and my car insurance have $500/deductible so the worst-case emergency of my house and car being destroyed would only cost me $1,000 out of pocket.
I think $1,000 is a great amount because it’s not a huge burden to build up initially. I think it took my wife and I about 6 months to come up with our initial $1,000 and it just makes you feel better knowing you have that money sitting there just in case. We decided to build the emergency fund before paying off our credit cards (which we successfully did before our son was born!) because we’d hate to be almost done paying off our cards and actually have an emergency that would force us to use your credit cards to cover. Sure we paid a few more dollars in interest by paying the debt off 2nd, but we gained peace of mind.
Peace of mind was worth it for us. Your mileage may vary.
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