Learning to love the emergency fund
Posted
Apr 28 2008, 07:47 AM
by
Karen Datko
Rating:
This post comes from J.D. Roth at partner blog Get Rich Slowly.
I wasn't raised in a culture of saving. My parents never made it a habit, and so could not pass the skill on to me or my brothers. In fact, I didn't establish my first savings account until three years ago, when I was 36 years old. (I had a passbook savings account as a young boy, but it never had more than $5 in it.)
Minor league start
Soon after I decided to take control of my finances, I opened a savings account at my credit union. I used it to build a starter emergency fund. I began to save for unexpected disasters. It took nearly a year, but eventually I saved $1,000. That wouldn't last long during a major catastrophe, but it was enough to cope with car problems and leaky roofs. I threw the rest of my money at debt.
I also opened another account, which I used for targeted savings. For example, when I decided I wanted a Nintendo Wii, I put my garage sale money into this second account. I sold some books to raise the balance so that I could afford my new toy.
This system has worked well for me. I still have $1,000 in my primary credit union savings account, and I'm using the secondary account to save for a new vehicle. But the credit union pays me only 0.37%. That's not a lot. When I finally paid off my nonmortgage debt last fall, I started a real emergency fund using a high-yield savings account.
Major league savings
After eliminating my debt, I suddenly had a sizable positive cash flow. I could have used this money to buy all the comic books I ever wanted, but instead I saved it. Based on feedback from my readers, I opened an account at ING Direct.
Every month I add a few hundred dollars to my emergency fund. I've also been stashing away small windfalls, like my Christmas bonus or checks for my birthday. As exciting as it was to pay off my debt, it's even more thrilling for me to build wealth. One of my goals for 2008 is to save $10,000. I'm halfway there; I've accumulated a little over $5,000.
Now that I've developed the habit of saving, I wish I had done so earlier. When something bad happens -- when I'm rear-ended while in a rental car, for example -- I no longer panic about how I'll find the money to deal with it. Sure I'm concerned, but I know that I have a cash cushion that will protect me if something really terrible happens.
Getting in the game
If you've delayed starting a savings account, consider opening one today. It's easy. Many high-yield online savings accounts have low minimum balances (just $1, in many cases), and some allow you to create automated savings programs with which you can schedule regular transfers from your existing checking account. When you get started, keep the following in mind:
Choose a bank that fits your style. My wife keeps her money at the bank she's been using for the past 20 years. She earns almost no interest, but it's convenient for her. And because she has self-control, she's not tempted to use her savings for other purposes. My emergency fund is with an online bank because I want to earn higher interest, and because I like that my money takes some effort to get to -- it's an additional barrier between me and impulse spending.
Prioritize. Having an emergency fund is important, but it's not the only thing. Most people should start small, setting aside $500 or $1,000. Next, they should focus on paying down high-interest debt. Finally, they should fully fund their retirement accounts. When these goals have been met, then it's time to beef up emergency savings. Your priorities may be different. If you worry about potential problems, then by all means boost your emergency savings first. Do what works for you.
Don't be discouraged by saving small amounts. If all you an afford is $25 each month, then save $25 each month. When I started, I was setting aside only $50 per paycheck (or $100 a month). It took a year to save that first $1,000. You can jump-start your emergency fund by using a windfall. Did you get a tax refund? Expecting a $1,200 rebate check? Consider using that to start a savings account.
I used to live paycheck to paycheck: No matter how much money I earned, I could find ways to spend it. My outlook has changed. And though I sometimes wish I'd discovered the joy of saving when I was younger, I'm glad to be learning it now. I love watching my balance grow every month.
Other articles of interest at Get Rich Slowly:
"How and why to start an emergency fund"
"Ask the readers: How much in an emergency fund?"
"Ask the readers: Emergency fund or debt snowball?"
