No Emergency Fund? Start it NOW

by MomGrind

empty pocketHeatherB of BlogHer feels guilty about spending money during the recession.

My take: she shouldn’t feel guilty about spending, IF her emergency fund is well-funded.

When Heather says “I haven’t been worried and I’ve been one of those fortunate people with an excellent job and great benefits with no sign (KNOCK ON WOOD) of losing any of the above in the near future,” what she SHOULD be saying is “I haven’t been too worried because I’m one of those fortunate people with an emergency fund that can carry me through six months of unemployment.”

Who Needs An Emergency Fund?

Everybody needs an emergency fund. You need to be in a place, financially, where you can handle unexpected expenses such as the car breaking down, the roof leaking, an unexpected tax bill or an emergency medical treatment that’s only partially covered by your insurance.

You also need to be in a place where losing your job, which is more likely during a recession even if you think your job is “safe,” does not mean losing your home, racking credit card debt, or tapping into your retirement account.  Once you get on the credit-card-debt path, it’s extremely difficult to pay it off and build wealth. Tapping into your retirement account before retirement is a very bad idea since you will pay penalties, and taxes at your income-tax rate. A home equity line of credit is also not your best bet these days, since it might not be worth as much now because of falling home prices.

Even if you think you can’t afford to set aside money right now, you need to find a way to do it.

How Much Money Should I Keep In My Emergency Fund?

Most experts say you should have enough set aside to cover three to six-months’ worth of living expenses. Does that sound doable? It is if you build it slowly and consistently. No one says you need to do it all at once. Contrary to what you may think, you don’t need a huge income to be able to save. Being able to save is a result of careful planning and disciplined execution. It has nothing to do with how much you make. Plenty of people earn a high salary but spend it all on luxuries and end up in financial ruin when emergency strikes.

How Can I Save For An Emergency Fund? I Don’t Have Extra Money

Yes you do. The best way to start an emergency fund is to track your spending for a month, figure out where you can cut back and direct that money to your emergency fund. For example, if you spend three dollars, five days a week, on a Grande Latte at Starbucks, this little indulgence adds up to about $800 per year. We make coffee at home using a French Press and freshly ground Illy coffee beans. It’s fresh and tasty and costs a fraction of what we would pay for the very mediocre coffee served at Starbucks.

If you indulge in a weekly $20 manicure, or in a monthly $200 shopping spree, your annual savings could be even higher. Other areas where you can probably save are magazine purchases (especially stupid women’s magazines), cable TV (we pay for the basic plan. Several of my friends gave up cable altogether), giving up your land line and using just your cell phone, eating out less often, and shopping around for cheaper car insurance. We saved almost $500 per year when we switched our car insurance.

Where Should I Keep My Emergency Fund?

Keep your emergency fund in an FDIC-insured money market or savings account. You’ll get a very low interest rate, but your principal will be safe and your money will be accessible if and when you need it.

What If I Already Have Credit Card Debt? Should I Pay It Off First?

Experts are divided on this one.  While some say you should have at least a $1000 cushion to avoid being forced back into more credit card debt if an emergency happens while you’re still paying your debt, others think credit card interest is so high, you should do everything in your power to pay down credit card debt first.

According to Kiplinger, the best answer lies in separating good debt from bad debt. It’s almost always a good idea to get rid of credit card and other high-interest loans before you start setting aside cash. However, you probably don’t want to accelerate mortgage or student loans at the expense of saving for retirement.

Earlier this week my car wouldn’t start. It was good to know that the only worry I had was the hassle of taking it to the car shop and paying to fix it. There was absolutely no question of where would I get the money to fix it. This is exactly what emergency funds are for.


I am not a financial adviser. The information provided here is general in nature. Prior to taking any action, please do your own research.

Photo credit: stuartpilbrow

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