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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