Category Archive: Emergency Fund

Establish An Emergency Fund

When my wife and I decided to get out of consumer and credit card debt eight years ago, the first thing we did was establish an emergency fund.

Our reasoning, based on the awesome book – The Total Money Makeover – was quite simple. We wanted to be able to deal with unforeseen expenses without adding to our credit card debt. We needed a cash-reserve.

When we started out, we had about $500 in our online savings account, so we decided on an even $1000 as a goal, for a mini-emergency fund.  Over the time it took for us to get out of debt, we accessed (and rebuilt) our emergency fund (say that five times fast) on two different occasions.  For us, $1000 was both a reasonable amount and a decent “cushion”.

We kept our emergency fund in our online savings account with ING Direct.  A few years ago, ING Direct was purchased by Capital One, so our online savings is now with them, in our 360 Savings from Capital One 360 account.  We love the convenience of connecting our online savings with our local checking account – and the Capital One 360 customer service is superb.  Other options for where to keep an emergency fund include a money market account, an interest bearing checking account, or even an old school passbook savings account.

Once we focused, building up our initial emergency fund took a relatively short amount of time.  We cut back on non-essential purchases and funneled our savings to our emergency fund.  Nearly a decade later, I can still remember the pride we felt when we saw that $1000 in our savings account – and the psychological boost provided was awesome.

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Quickly Fund $1000 Emergency Fund

When my wife and I decided to get out of debt, the first thing we did, after creating a zero-based budget, was to fund a $1000 emergency fund.  We then put our credit cards in the back of our wallets – and began the real process of paying down our debt.

Open a savings account.  If you don’t already have a savings account – now’s the time to open one.  Personally, I’m a big fan of both the Ally Bank Savings Account.  An online savings account allows for easy access to funds – and easily connects to your local bank for transfers.

Have a garage or yard sale.  I know it sounds a little old fashioned, but a garage or yard sale is a great way to make a few extra dollars.  We have a yard sale every year or so – and we usually make between $200 and $500 dollars.  Plus, it’s a great time to rid yourself of some clutter.

Scrap some stuff.  A few months ago, I helped a friend carry some old junk metal to the scrap yard.  I was shocked by how much we made – especially when they gave us a pretty decent amount for an old, broken treadmill.  You may even have neighbors who will pay you to take their junk – and you can then scrap it.

Remember eBay.  I was looking at my eBay account the other day – and was shocked to see that I’ve been a member since 1999.  Wow.  Back when our kids were younger, I managed to make a decent amount of money selling baby clothes on eBay.  The selling system on eBay is much more user-friendly than it was years ago – and it’s still a great place to get rid of stuff you don’t need.  (I know that lots of folks use other sites to list items for sale, but eBay is the only site that I’ve used.)

Find a temporary second job.  I am married and have three kids, so it’s difficult to find time for extra work.  However, over the years, I’ve managed to find odd jobs – usually involving work online – to supplement my income.  In fact, this very site is a supplement to my regular job.  If getting out of debt is important – finding extra work will be, too.

Scrounge for change.  This one is actually kinda fun – especially if you have kids.  My son loves to look for change, around the house, in the van, even in my golf bag.  Take a few minutes, dig around, remember when you used to be able to put 5 gallons of gas in the tank for 5 dollars worth of quarters, and see what you can find.  You might surprise yourself.

Return stuff.  Did you make an impulse buy?  Then, make an impulse return.  If you have your receipt and the item is unused, you’ll get your money back.  Obviously, abide by each store’s return policy – but don’t leave stuff in your closet, with tags, just because you are too lazy to take it back.

Analyze your monthly bills.  This one is easy.  Take a look at your monthly cable, satellite, telephone, and cellphone bills.  Either discontinue service, call for discounts, or change plans.  Do this often!  Remember, any monthly savings is deposited in to our savings account.

Create a savings-transfer routine.  This is critical.  Do not simply automate your savings – be intentional.  Once or twice a week, transfer any amount that you have saved into your online savings account.  Get connected with the process – it will mean more to you.

On several occasions, especially early in our debt reduction process, my wife and I had to use funds from our emergency fund.  We always took the time, even in the middle of our debt reduction, to rebuild our emergency fund.  We managed to avoid the use of credit cards – and soon found ourselves debt free.

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The Emergency Fund

Savings.  Rainy-day Fund.  Cash Reserves.

The Emergency Fund.  It goes by many names, and whatever you want to call it, ours helped us to get out of debt.

Why we established an emergency fund before attacking our debt -

When we first decided to start paying off our consumer debt, we were pumped.  It would have been very easy for us to have used every extra dollar to reduce our debts.  However, we were concerned about emergencies – those unplanned-for expenses with which we must all deal.

So, even before we began to attack our debt, we funded an emergency fund.  Having a small amount of cash reserves removed the necessity of using a credit card and proved invaluable to our debt reduction process.

Where we kept our emergency fund -

We have been using an online savings account with Ing Direct for more than a decade. We simply initiated transfers from our primary checking to our online savings – and quickly built our emergency fund. (A good friend of mine recently opened an account with Ally Bank and he has been very pleased with their interface and customer service.)

For us, it was important to keep the money in our emergency fund accessible.  A checking account or saving account at a local bank would have sufficed, but we wanted the slightly higher interest that our online bank offered.

How we determined how much to keep in our emergency fund -

When we first started, we simply went with the basic $1000 emergency fund.  Over time, we modified our emergency fund, based on some real numbers.  We calculated the deductible for one minor car accident, plus the cost of replacing one appliance, plus the cost of three trips to the kids’ doctor.  Calculations will be different for every individual or family.

There was (and is, really,) no way to know exactly what might happen in any given month.  We wanted to be prepared, should our dryer have gone on the fritz, and one of our kids gotten sick, and had I hit a deer with my truck.  Honestly, if all three of those things were to have happened, in the same month, we would have had to use our credit card for any other emergency.  Thankfully, we made it through our debt reduction process, and only had to dip into our emergency fund a couple of times.

The goal isn’t to plan for every eventuality.  The goal is to plan for reasonable eventualities.

How we found the money to fund our emergency fund -

We worked very hard to reduce our monthly spending.  We cancelled unused services, we scaled back on others, and we started to live on a zero-based budget.  We sold things we did not need and we cut back in nearly every area of our lives.  We made saving our money a top priority.

Why we increased our emergency fund balance after we got out of debt -

One of our goals, indeed the mission of No Credit Needed, is to live without needing credit.  If we are going to avoid the use of credit cards, we need cash reserves.  At present, we are working to rebuild our emergency fund, so that we have enough cash to cover our basic living expenses for twelve months.  I recently changed jobs, at a reduced salary, so building savings (while paying off our mortgage) is challenging.  We keep pressing forward.

Every paycheck is an opportunity to exercise wisdom.  We believe that increasing our savings is a wise thing to do.

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Break The Credit Card Cycle

It has been several years since my wife and I regularly used credit cards for monthly purchases.  Instead, we use cash, debit cards, and online bill pay.  Here’s how we broke our credit card cycle –

1.  We put our credit cards in our wallets – and just left them there.  We didn’t cut them up.  We didn’t cancel them.  We didn’t put them in the freezer.  We simply made a decision not to use them on a regular basis.  Over the past six years, this has served us well.

2.  Before we started living on a budget and getting out of debt, our credit card served as our emergency fund.  If we were a few hundred dollars short at the end of the month (due to real needs and / or just wants), we would use our credit card.  The first thing we did, when getting out of debt, was establish a real emergency fund.  Obviously, no fund is big enough to cover every-single-emergency-imaginable, but we had to start somewhere.  Our goal, in those early years, was to keep between $1000 and $2000 in our emergency fund, at all times.

3.  We live on a budget and created a structure for managing our daily and monthly spending.  Click link to see yesterday’s article on this subject.

4.  We use the envelope system – which really helps to keep cash spending down, keep things organized, and promote smart shopping.  There was a time when, if I had cash in my pocket, I would spend it.  If I had $5, I would spend $5.  If I had $100, I would spend $100.  However, once I made the promise to myself that I was “done” with credit cards – I had to get serious about proper cash management.  Without the safety net of the credit card (and with no desire to constantly dip into our emergency fund) we quickly learned to be smarter with our cash.

5.  We routinely use our debit card “like” a credit card.  I use it online and I’ve even used my debit card to reserve a rental car.  A bit concerned about using our debit card for online purchases, I opened an Electric Orange℠ checking account from ING DIRECT.  (Right now, ING is offering a $50 bonus if you sign up for their Electric Orange checking.)  We keep a limited amount of money in the account, separate from our primary checking account, and use the Electric Orange account for all online purchases.  This works well for us – but we do have to be careful.  It’s easy to overspend when simply swiping a card or punching in those 16 digits, credit or debit.

6.  We ignore bonuses, rewards, and discounts associated with credit card use.  I’ll admit it:  It can be difficult ignoring all of the “extras” associated with credit card use.  However, for us, we would rather focus on zerothat’s the amount we owe credit card companies – than on the 5% discount or 2% cash back we might receive.  Sure, the “extras” would be nice, but we’re doing just fine.

That’s how we broke our credit card habit.  If we chose to do so, we could start using our credit cards again.  We do a much better job of managing our finances than we used to do.  I’m sure we could use them without a hitch, but we’re going to keep doing what’s been working.  Our system works just fine for us.  However, if we were to use credit cards again, we would simply use them and pay them off at the end of the month.  The focus of this article is not on abandoning credit card use, forever, but on how we broke the cycle of over-using them, and having to pay interest and fees.

 

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