Despite conventional wisdom suggesting that it would be wise to have a stash of savings set aside for unforeseen events that life could throw your way, many Americans opt to forgo the safety net and face life’s challenges on a whim.
What is an Emergency Fund Exactly?
For some of you, defining what an emergency fund ISN’T may give you a better idea of it’s true purpose. An emergency fund isn’t:
- a cushion you leave in your checking account.
- money set aside for bills or expenses that will come within the next year (i.e., car repairs, Christmas gifts, property tax, or back-to-school supplies).
- money you dip into for a rockin’ sale at Best Buy, Gap, or the new iPad coming out later this year.
An emergency fund, as the title suggests, is cash set aside (in a savings or money market account) for EMERGENCIES. In my mind emergencies would be things along the lines of unexpected medical expenses, a job loss, or a short-term disability where you’re unable to work.
The major issue I commonly run into, and the reason most Americans are strapped for cash in the event of REAL emergencies, is that most people use their savings/emergency fund cash for expected expenses like car repairs, property taxes, house repairs, or to pay their semi-annual life insurance premium.
Personally, the WorkSaveLive household sports TWO savings accounts: one for expected expenses and one for emergencies.
How Much Should Be In Your Emergency Fund?
If you have debt, particularly car loans, credit cards, or personal loans, then I suggest you have somewhere between $1,000-$5,000 saved (the more income and expenses, the higher in that range you should have).
Once you’re out of debt then I would have at least 4 months worth of income or living expenses stashed in that emergency fund account. Some people I’ve met with prefer to have 12 months and I’ve seen a myriad of ranges in-between. At the end of the day it really depends on what you’re comfortable with, but I’d always caution that you shouldn’t have too much money that isn’t bearing much interest and losing pace to inflation.
Should You Invest Your Emergency Fund?
If you’re smart, no. Personally we have our emergency fund in a money market account, however other good places would be in a savings account like EverBank where you can get a bonus introductory rate right now, or in staggered CD’s at a place like Ally Bank where the rates on CDs are amazing!
I don’t suggest you put it in the stock market, invest in gold or peer-to-peer lending, or leave hundred dollar bills buried in the back yard or hidden under your mattress.
I realize you’re not going to get rich on the interest you’re making, but getting rich isn’t the point of your emergency fund. The point is for it to be there when you need it most.
4 Ways to Build Your Emergency Fund Faster
1. Sell stuff around the house
I’m willing to bet there is stuff lying around your house or stored in your attic that you haven’t used, wore, or touched in ages. Get rid of it! Host a garage sale or post it on Craigslist, Ebay, or Amazon. My friends over at See Debt Run just sold their guitar and amp as they’re working on getting out of debt. Sure, it’s tough to get rid of some of our possessions, but if you’re not using it, what’s the point of keeping it?
2. Get a part-time job or work overtime
If you’re serious about padding your emergency fund in a short amount of time then taking on a 2nd job (or working overtime) is a sure-fire way to get there. While it’s a difficult sacrifice to make, we’re just talking about committing a few months worth of your time; in the grand scheme of life, 6 months out of the next 40 years you’re alive is a drop in the bucket.
I have a few investment clients that work the part-time morning shift at UPS making $12/hour; while it’s not a lot of money and the shift is only 3 hours/day, they are getting GREAT health insurance, a company match on the 401(k), building a SWEET pension, AND padding their emergency fund!
3. Cut a particular budget category for a few months
For the first year and a half that I was overcoming my broke and desperate phase, I stopped eating out. Completely.
I also canceled cable, reduced my cell phone package, and took time to shop my home and car insurance rates. In a matter of weeks I was able to save an extra $400/month that helped me build my emergency fund faster than I thought was possible.
4. Give plasma or become a pin cushion
While plasma donation centers are thought of as a gathering center for junkies — at least it was for me — it’s actually a decent place, with normal people, where you can earn some extra cash while saving a life.
You’re able to give plasma up to two times a week, and for 1-2 hours a pop you could net $20/visit. While it might not be a lot, an extra $160/month will get you to your $1,000 emergency fund goal in 7 short months.
Have you ever had to dip into your emergency fund? What it for a real emergency or was it for one of those bills that we all know is coming?