The goal: Dedicate 1 hour a day, for 7 days, and improve the health of our finances.
Hour 5 (00:00 – 60:00)
Establish an emergency fund –
While we were getting out of debt, our emergency fund was limited to $2000.
After getting out of debt, we increased the amount of money in our emergency fund to six months’ worth of expenses.
For us, we chose to keep our emergency fund in our ING Direct Orange Savings Account. Other alternatives would include an interest bearing checking account, a savings account with your local bank or credit union, or a money market account.
The emergency fund serves as a buffer between us and the unexpected expenses of life. Without our emergency fund, we would have to depend on credit, should we face an unplanned-for expense.
Opening a new savings account with ING Direct, only takes a few minutes, and due to the fact that ING requires no minimum initial deposit, there’s no reason for anyone to live without a place to keep an emergency fund.
There are several ways to determine how much money should be kept in an emergency fund. For us, we simply looked at our budget, subtracted any items that we could easily do without, and multiplied that number by 6. Due to the recent downturn in the economy, my wife and I are seriously considering increasing the amount we keep in our emergency fund, equal to an entire year’s worth of expenses.
Over the course of this week, I’ll write two more articles about improving the health of our finances. Each article should take just a few minutes to read, and the steps outlined should take about an hour to do. Depending on the health of your finances, you might be able to breeze through the steps in just minutes – or it might take you much longer, if things are in need of repair. My goal, however, is to keep the steps to a minimum, and to make them as easy-to-follow as is possible.
Consider Hour 5. If you will take the time to do all of the steps outlined above, you’ll have established how much you want in your emergency fund, opened an account into which you can begin to deposit your emergency fund, and started the process that will move you away from credit and towards cash. And, you will have accomplished all of these things, in about an hour!
If you haven’t done so, be sure to subscribe to No Credit Needed, via email or RSS, and make sure you catch hours 6 – 7.
I’m a big fan of emergency/short-term savings. It makes sense to have money ready to address any unexpected things life throws at you. But for some reason I don’t feel comfortable with less than at least $4000 or $5000, even when paying off debt.
Is $2000 really enough to ensure you don’t have to use credit when an emergency happens?
I think it depends… For us, 2k was enough… Sure, if we had a “major” emergency, then we would have had to use our credit cards… but, the trade off between having more for debt reduction and less in our e fund was worth it..
We have two EFs set up. Our “regular” emergency fund has a maintained balance of $1000. This fund is for true emergencies that come up for which we might not otherwise be budgeted: car repairs, washing machine goes, etc. Our other fund is called our “income security fund” – the goal of this is to offset the loss of income of either my wife or I, and (when fully funded!) will pay our expenses for about 6 months (~$10,000). While our regular emergency fund is fully funded, our income security fund is slowly growing, and should be fully funded in a couple years.
I’m a BIG FAN of multiple savings accounts. We currently fund 10 separate accounts.
My emergency fund sits between $1000-$2000 at the moment. We will always have the $1000 in there but like to keep extra just in case. But we allow ourselves to use part of it in order to pay off debts faster.