The 7-Day Turnaround, Day 2: Build an Emergency Fund, Quickly
This is the second article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.
Experts argure over the first step of a money makeover. However, anyone who has ever been close to the edge, or hanging over the edge, will agree that there is no feeling like having a financial cushion. I heard someone sum it up that there is no softer pillow than money in the bank. So true. Instead of sitting up at night fretting over the next bill, or counting the days until your next paycheck, take actions now to put some distance between you and the edge.
Take drastic actions immediately to begin an emergency fund. Of all the steps in the 7-Day Turnaround, this one may be the most important, and one you simply cannot afford to delay. Carrying debt creates a vicious cycle. Your available cash is spent making large credit card minimum payments. When the hot water heater breaks, or the transmission goes out, you have no cash reserve and reach for a credit card. This is like trying to climb an escalator with the stairs moving in reverse. The faster you run, the faster the stairs move, but when climbing out of a hole of debt, the stairs are always moving just a little faster thanks to fees and interest. This means you are constantly losing ground. The only way to break this cycle is to implement an emergency fund, a place to turn for those untimely breakdowns and emergencies.
An emergency fund is not an investment vehicle. Forget about interest rates and investment options. The only thing you are concerned with is liquidity - how easily you can access your money. Ideally, your emergency fund should be parked in a bank or credit union savings account linked to your checking account for easy access. If the savings account comes with ATM access, even better. Murphy tends to visit on the weekends and late at night, making traditional bank access impossible. Many online banks offer a fantastic rate on savings products and allow electronic access to your money. ING (affiliate) offers such a product. Beware, sometimes the electronic transfers can take up to three days to process, so opt for a product with an ATM card or checkwriting priviledges.
I recommend keeping a minimum of three months of living expenses in your emergency fund. Notice I didn’t say income. Three months of living expenses should cover mortgage payments, car payments, insurance premiums, household utilities and food. Credit card payments, luxury purchases and gym memberships could all be skipped in a real emergency such as a job layoff. For most families, $10,000 is a good, round figure covering roughly three months of household expenses.
If you are like most people you probably don’t have much disposable income to put towards an emergency fund. This is where drastic measures come in. Round up books, DVDs and other small items that can be easily shipped and list them on eBay. Here are some great tips for selling on EBay. For larger items, consider listing in a local credit union or bank bulletin, or on Craigslist. Furniture, fitness equipment, and kids toys tend to generate a lot of interest in local advertisements. Things that don’t sell online can be collected for a yard sale. Schedule a yard sale around the first of the month, preferably after the first paycheck of the month.
Sign up for legitimate, online money-making opportunities such as CashCrate. You will not get rich from these ventures, but every single dime you earn should go directly towards your newly established emergency fund. Most families can establish their first $1,000 in one month or less, just by boosting savings from their paycheck and/or selling items and part-time earnings.
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Great tips for building an emergency fund! And an emergency fund is SO important. We learned that the hard way this year. Thank goodness we had one! You never know when you’ll need it!
[…] a recession proves to be a good time to increase your cash position. Not only does a healthy emergency fund help pave over short-term bumps in your household finances, it also allows you the opportunity to […]
If you’re single (and perhaps even if you’re not) $10,000 should be more than enough to cover 3 months. If you stretch your dollars, which you should do in the event of a real emergency (job loss, etc.) that $10,000 should last about 4 - 6 months.
[…] one, no-fee, low-interest card with a decent amount of available credit until you are finished with Step 2: Building an Emergency Fund. This will leave you some available funds in the event of a major financial disaster. Once your […]
I am just getting caught up on my feeds and ran across this. Great minds must think alike because I just talked about emergency funds today. Excellent tips- thank you!
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No kidding - the Efund is a huge piece of the financial puzzle that more people need to realize. I know when you’re sitting between broke and REALLY broke that it is tough to stuff away 5 or 10 bucks, but it really does add up over time as long as you don’t have to USE the Efund…
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[…] for the mortgage back around February of this year. Since then we have been pouring money into our emergency fund. We are now satisfied that we have the equivalent of three to six months of living expenses […]
[…] all debt repayment above and beyond my minimum payments. With the extra money I added to my emergency fund, as sort of a first line of defense in case of unexpected medical costs, or a lengthier hospital […]