emergency funds and why YOU need one

Call it an emergency fund, a rainy day fund, or an “Oh crap I just got laid off and now the world is ending fund.” It all handles the same problem. When something unexpected comes up in your life that airs on the unfortunate side, an emergency fund is used to soften the blow to your financial well being. I say “on the unfortunate side” because it is used to cover bad things that happen like car repairs, appliance break downs, or broken pipes (and NOT happy impulse things like a new puppy or flat screen TV).

An emergency fund is just that, a cash cushion that takes care of small to mid-level emergencies so as not to totally destroy your finances. Gallup did a survey about a decade ago and found that 40% of Americans didn’t have any kind of emergency savings. A more recent survey (2016) found that number has climbed to 47%; THAT’S THE LEARNING CURVE!  They defined an “emergency” as an unexpected expense of $400. That means in today’s America, nearly half of the country would be financially destroyed by a $400 expense. It means payments become late, mortgages get behind, and the financial hole continues to deepen all because we didn’t have the hindsight to save a little more.

I write this post for two specific reasons. The first is user feedback and their questions about emergency funds. The second is I’ve seen this issue happen more times than I care to among my own friends. I’ve seen people get destroyed and go into a downward financial spiral because of a flat tire, and it breaks my heart to know it could have all been avoided.

Virtually all financial figureheads, planners, and speculators agree that EVERYONE needs to have an emergency fund. The notion of an emergency fund makes sense, but the disagreement is in the amount to save. Depending on which book you read, you’ll probably find an answer between three and six months’ worth of your personal expenses. That means if you spend $2,000 per month to keep your household running, you should save somewhere between $6,000 and $12,000. Now I’m fully aware that’s a lot of cash to just allocate to nothing but sitting in a savings account, but let me explain how I handle mine, and maybe that will help set you at ease.

First, I don’t think you need to save it all at once. I side with Dave Ramsey on the option where you should stop spending on everything discretionary (movies, eating out, the coffee shop) and save $1,000. Just as a place to start, stop spending, and save that first $1,000. Your not having an emergency fund is a BIG EMERGENCY. It will only take a short time to save it up if you focus. If you have trouble, try to sell a few things on Craigslist you no longer use (like many of the things we own, unfortunately). As we come upon tax day, I highly recommend setting aside your entire refund (if you get one) to your emergency fund.

Everyone should have at least $1,000 set aside for emergencies. This simple step can cover you for a large majority of emergencies. Some big emergencies that $1,000 won’t cover are losing your job or a car accident totaling your mode of transportation. I hope you never experience either, but don’t think it can’t happen to you. Just last week I watched my sizable and stable employer dismiss 15% of its staff without warning regardless of their longevity.

One of the biggest complaints, aside from the difficulty in amassing such a large sum of money, is that the money is sitting stagnate and doing nothing. I take a number of issues with this statement. First, I often notice those making this statement don’t actually invest their money and are just angry they can’t spend it on something they don’t actually need. Second, the money can be put into a number of places where it is safe and can still grow. Finally, the money isn’t “doing nothing”; it is serving a greater purpose bringing you peace of mind and helping you sleep at night.

To make this more palatable, I’ll walk you through what I do for my emergency funds. I used to have multiple savings accounts across various platforms to hold money. I had some money in a personal savings account (easily accessible), a digit savings account (internet bank, still easily accessible but more cumbersome to get at) and in a money market account (still easily accessible in my opinion but earning better interest). I have since modified my approach and combined the funds into a single account but still think of them separately in my mind.

  • First, I keep $1,500 for quick emergencies. This is to handle any repair-related expenses that come up unexpectedly.
  • Second, I have a fund of $8,500 in case of something more major like suddenly needing a new car or being laid off.
  • Finally, I own rental property, and for my own sake, I keep another $10,000 of my personal money stored in this fund to cover things like broken pipes, a new roof, and other unfortunate repairs in the real estate world.
  • My grand total is a hefty $20,000 safety net. This comes with a side note that the money for my rental property is being returned to me at some point. I treat the property as its own business entity with its own money. As the coffers of the house increase to where it has its own emergency fund, I will then swap my money out, freeing up a nice $10,000 paycheck for myself for my stewardship. I also don’t plan to take a dime out of my rental property until this threshold is met; after that point I will begin to collect a paycheck from that as well.

Being the investor type that I am, I don’t like leaving $20,000 just sitting in the bank earning me .01% interest – I’m looking at you Wells Fargo.  I did originally have the bulk of this in a money market account or in a bond index fund to grow a little more, but that earned around 4-5% interest and wasn’t really jiving with my thoughts on keeping it safe. Remember the market could take and wipe it all away!

Enter the Kasasa savings account and Frontier Bank! A friend of mine turned me to this bank, and I left my prior bank, moving all my personal funds over for one simple reason: Checking accounts earn 3% interest. Yep, you read that right, and I know what you’re thinking: Ka-Ching! There are a few simple rules to follow like maintaining a balance (the easy part since it doesn’t get low) and having a certain number of transactions in a month. I meet this by putting my personal checking account in the same account and using it as normal. Now this is where it takes a great deal of discipline. When you look at your checking account and notice you have $20,500, you have to be able to block that out and change it to read $500.  This is how I view it, that way I get the maximum return for my money without the volatility of the markets without any extra effort on my part. The best part is I now have exemplary customer service on top of earning $50 of free money each month for doing nothing different in my life!

If you happen to be interested in an account like this, let them know I’ve sent you! (My name is Peter Krentz.) Sometimes they give you free money when you get referred by a friend.

Learn more about Kasasa Personal Accounts.

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