Emergency Fund Archives - Smart On Money

How Much Money Are You Saving In Your Emergency Fund? Have You Ever Had To Use It?

Earlier this week there was a discussion at getrichslowly.org about a poll they had done about emergency funds.

One of the findings was that the amount people were saving in their emergency funds seems to be dwindling over the past 5-6 months.

After reading that post I started looking for other polls to find out how many people are actually saving up an emergency fund in the first place, and to see what they believe is a good place to get their emergency money.

Poll About Emergency Funds

The numbers seem to vary a bit depending upon the source, however, I found a Gallup poll from a few years back that found only about 4 in 10 Americans say they actually have cash on hand in case of an emergency. Only 10% say they have $1,000 in cash available in case of an emergency.

When you dig a little deeper you find that a lot of people aren't depending mainly on cash savings to bail them out in case of an emergency.

Three in four consumers say they would use their savings account as a money source in case of an emergency. Fifty-six percent say they would use credit cards and 50% would borrow from a relative. Thirty-nine percent say they would use their 401k retirement account and 37% say they would use their home equity account.

So besides cash savings (75%), people say they would use these sources to help pay for an emergency:

Credit cards (56%)
Borrow from relatives (50%)
401k retirement account (39%)
Home equity loan (37%)

Based on the fact that only 10% say that they have $1,000 in cash on hand for an emergency, and the fact that so many are depending upon other ill-advised sources of emergency money, I'd have to say people are in general woefully under-prepared.

How Much Money Are You Saving?

So the question is this – how much money are you saving in your emergency fund? Most experts (like Dave Ramsey) will suggest that you save at least 3-6 months of expenses in an accessible cash account.

Personally I think that's a good start, but at our house we usually fall more on the conservative side of things because of the large number of emergencies we've experienced in the past 3-4 years (hospitalizations, baby, car troubles).

We're currently sitting on a nice 10 month cash reserve in our online savings account, and we're building it to 12 months. With the economy as it is, and with one spouse staying home to be with our son, we just feel more comfortable having a bigger cushion in case something were to happen. And something WILL happen.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Have You Had To Use Your Emergency Fund Yet?

Another question for commenters: Have you had to dig into your emergency fund at any point yet? I'd be curious to know what types of expenses count as an emergency, and just how big those expenses were.

For us we've been in a state of continually renewing our emergency fund over the past few years. First my wife was in the hospital for several weeks, which ended up costing us several thousand dollars after insurance kicked in. Our emergency fund covered it, and we quickly refunded it.

We also had a car that died on us – when the engine decided to give up the ghost. Luckily we had saved up a car replacement fund, and only a small amount of our emergency fund was touched.

Next we had another hospitalization for my wife – again covered by insurance, and then by our emergency fund.

So as you can see – major negative events can and will occur – even frequently sometimes!

How much are you saving for your emergency fund? If you don't believe in having a large cash reserve, how will you be paying for any emergencies that crop up? Have you had to use an emergency fund yet? If you have, what was the emergency? Tell us your thoughts in the comments.

Dave Ramsey’s 7 Baby Steps: Step 1 – $1000 To Start A Baby Emergency Fund

By Mr. Money Leave a Comment

In one of my first posts on this site I gave a brief overview of Dave Ramsey's 7 Baby Steps, and gave links to a few other sites who talked about them.

Today I want to begin my series on the 7 Baby Steps by talking about Baby Step 1, saving up $1000 for a baby emergency fund.

Before You Start The 7 Baby Steps

The 7 Baby Steps can be a life changing paradigm shift for many people, but like any program to help you get out of debt and prosper, you need to be ready to change your lifestyle, and make some drastic changes to the way you're living. You have to be ready to commit to no more consumer debt, and know that people are going to think you're off your rocker. You're going to stand out from the crowd and be different – but that's OK! To prosper and get ahead, you have to be different! As Ramsey says:

You have to live like no one else, so that later on you can live like no one else!

You'll need to make some short term sacrifices so that later on you can prosper and give more and live more!

Dave Ramsey’s 7 Baby Steps

So here's a quick look at the 7 baby steps. Today we'll cover step 1.

Step 1 – $1,000 to start an Emergency Fund
Step 2 – Pay off all debt using the Debt Snowball
Step 3 – 3 to 6 months of expenses in savings
Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
Step 5 – College funding for children
Step 6 – Pay off home early
Step 7 – Build wealth and give!

Baby Step 1: $1,000 To Start An Emergency Fund

The first thing you need to do when you're on the Baby Steps plan is make sure your necessities and minimum payments on your bills are taken care of. Then, you proceed to baby step 1 where you save a $1000 emergency fund. What’s an emergency fund? An emergency fund is your backup plan for when things go wrong. What kinds of things could go wrong? Here's just a start:

Auto needs repair
Unplanned emergency room visits
Lost job
Family funeral or wedding to attend
An occasional bill you forgot about (like your property taxes for example)

Unplanned Expenses Happen To Everyone

There's an adage, known as Murphy's Law, that says, “Anything that can go wrong, will go wrong“. Dave Ramsey likes to say that an emergency fund will help keep those “little murphies” at bay and keep you from having a small emergency turn into a bigger one.

The problem is that we all have major negative events in our lives, but not very many of us actually plan for those occurrences.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

78% of us will have a major negative event. Those numbers alone should startle you into realizing your need for an emergency fund. And those numbers are only for the MAJOR events – we all have a ton of smaller expenses that pop up every year.

Is A $1,000 Emergency Fund Enough?

A lot of people see this first step in the baby steps plan and immediately bring up the point that $1000 just doesn't seem like enough money to save up for your baby emergency fund. Ramsey suggests that for most people it IS enough to cover most emergencies. All of them? Maybe not, but that's what Baby Step 3 is for, to save up a larger emergency fund to cover just about any major occurrence that could happen.

My wife and I ended up saving $2000 for our baby emergency fund – so we did increase the amount just a bit. I think the key is to look at your situation, see what is reasonable to save up fast – in 1-2 months, and go with that. Depending upon your situation a little less than $1000 might even work.

Where To Keep Your Emergency Fund?

When you save for an emergency fund a question often comes up, “Where should I keep my money?”. People want to know if they should keep the money in a CD, a online savings account or some other type of account. Ramsey suggests that you keep this money accessible, preferably in a bank with a local branch nearby, where you can get to the money quickly in an emergency.

Personally my wife and I keep our money at our l0cal bank in a money market savings account. It doesn't earn much interest, but that's not really the point of the baby emergency fund. The point is to insure against those unplanned events. When you save up your larger emergency fund later on, you'll have more options on where you want to save that money.

Where do you not want to keep your $1000 emergency fund? Keep them out of CDs, stocks, real estate, or other investments. Keep it somewhere you can get to it in a short period of time.

Do Your First Budget

After you have decided to save up your $1000 emergency fund, the next step you'll want to take is to do your first “quickie budget” as Dave Ramsey calls it. The reason? If you're going to save the money and get out of debt, you have to know where your money is going, where you can cut, and where the money will come from to pay off your debts. Download Dave Ramsey's “quickie budget” .pdf here:

Dave Ramsey Quickie Budget

Beyond doing a quickie budget, it would be a good idea to do a more in depth budget if you can using a free budget software like the one from mint.com.

A budget is telling your money where to go, instead of wondering where it went.

After you pay the minimums on all your debts, save as much money as you can towards your $1000 emergency fund. If you need to sell some things on Craigslist, get a part time job, or sell your sacred baseball card collection, just do it! Do what you have to and get that $1000 saved!

Next Time: Baby Step 2 – Pay Off All Debt Using The Debt Snowball

After saving up your $1000 emergency fund, the next baby step is to pay off all your debts using the debt snowball. Stay tuned for that next time!

Have you used Dave Ramsey's baby steps? Were you able to get your $1000 saved up quickly when you started? What did you have to do to get it done? Tell us your thoughts on the Baby Steps in the comments.

Roth IRA: Emergency Fund?

By Miranda Marquit 5 Comments

I recently found out that one of my associates uses her Roth IRA as an emergency fund. Rather than put money into a low yield savings account, or some other cash account, she uses her retirement account as an emergency fund. Technically, the basics of a Roth IRA are conducive to this arrangement. However, you do want to be careful. Think things through before you use your Roth IRA as an emergency fund.

Why Your Roth IRA Could, In Theory, Be An Emergency Fund

In theory, your Roth IRA works as an emergency fund because of the withdrawal rules. You are actually allowed to withdraw your contributions to a Roth IRA at any time, and for any purpose – no matter your age. This means that you can take money out of your Roth IRA with no penalty or tax, as long as you are only withdrawing money that you have sent to the account through regular annual contributions. As long as your withdrawal amount doesn't exceed your overall contribution amount, you don't have to pay a penalty or taxes. Keep in mind that previous withdrawals count against your overall contribution amount.

Roth IRA Emergency Fund

You do have to be careful, though. Withdrawing from your Roth IRA can cost you if you don't do it right. If you are under 59 1/2, and you exceed your contribution amounts (except in certain cases), you might be subject to a 10% penalty and to paying income taxes on the amount. Make sure you know what you are doing before you withdraw money from your Roth IRA to shore up your finances in the case of emergency.

Opportunity Cost

While you might not have the expenses associated with penalties and taxes when you withdraw your contributions to your Roth IRA, you are still subject to opportunity cost. Remember: The money in your Roth IRA is working for you. You are earning interest at a pretty good rate (depending on your asset allocation and market conditions), and if you withdraw principal, you miss out. You can't replace the time that your money might have spent in your Roth IRA, growing with the power of compound interest.

On the other hand, though, some insist that the opportunity cost comes when you put that money in a low yielding cash account as an emergency fund. Because your money (theoretically) grows faster in the Roth IRA, the power of compounding interest at a higher rate makes up for the fact that you withdraw some of your contributions for emergencies.

Bottom Line

What you decide to do depends on what you think is likely to work best for you, and provide for your needs. If you plan ahead sufficiently, it should be possible to get quite a bit built up in your Roth IRA. Of course, for it to work, you need to make sure you only withdraw contributions in cases of true emergencies. If you use your Roth IRA as an ATM, you could easily remove all of your contributions quickly — and then move into penalty areas where it starts costing you more. Make sure you carefully evaluate your situation before adopting this emergency fund strategy.

Do You Have Savings In Case Of An Emergency? 1 In 4 Americans Have Zero Emergency Savings

By Mr. Money 10 Comments

As the economy continues to be stagnant and the unemployment rate continues to be high, a recent poll by BankRate.com found that still far too few people are preparing for the possibility of a job loss or a long term financial emergency.

Over 6 million people have been out of work longer than six months, yet only 24 percent of Americans have at least six months' expenses in an emergency fund. An equal 24 percent have nothing tucked away for a rainy day. And 22 percent have some savings, but not enough to cover even three months' expenses. Those under age 30 and the lowest-income households were most likely to report having no emergency savings at all.

As the poll found, only 24 percent of Americans have saved a minimum of 6 months of expenses in an emergency fund or saving account of some kind. To be honest I guess I'm not surprised that in our credit focused society that only 1/4 of people have saved up 6 months of expenses, but to some degree it's still sad that so many people are unprepared. Are they hoping that someone else – or the government – will pick them back up when they've fallen? I wouldn't count on it.

emergency savings

Why Are Emergency Funds Important?

There are a variety of reasons why I think emergency funds are more important than ever.

Bad Things DO Happen

I think a lot of people have the outlook that bad things happen to other people, or that if something bad does happen, it won't be that big of a deal. The thing is, most of us are going to have a major negative event at some point.

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

78% of us are going to have a major negative event to deal with in any 10 year period. I know that has certainly held true for our family has we've had to deal with several major negative health events. So if you haven't had one recently, you may be due.

Emergency Savings Help You Bounce Back Quicker

The fact that you have an emergency fund can help you to weather any number of storms from a layoff to a major health event. While you can't always avoid bad situations, when you have an emergency fund you're able to bounce back that much quicker. When you don't have an emergency fund the sad fact is that people end up in foreclosure, bankruptcy and other horrible situations I wouldn't wish on my worst enemy.

Why not plan ahead and avoid all those things?

Emergency Savings Give Peace Of Mind

When you have emergency savings you'll have a lot more peace of mind when the waves start to get higher and the adversity starts showing up. When you've got emergency savings, insurance and a backup plan, you won't be as worried about some of the bad things that can happen.

Have A Backup Plan

So many have not planned ahead for the negative events that will happen in life. They don't have emergency savings, they don't have insurance and they are just hoping that someone else will cover the bill for them. While in some cases that may happen, far too many will find that there isn't anyone there that they can rely on, including the government.

Do you have an emergency fund saved up? How much are you saving in case of an major negative event? Why do you think so few people save up in case of an emergency?

How To Financially Prepare For A Disaster

By Miranda Marquit 9 Comments

There is no way to be completely prepared for a disaster. However, you can do your best to prepare yourself financially for an emergency that could cause you problems. If you haven't thought about it in the past, think about it now. Recent events, from large scale natural disasters (such as the earthquake in Japan) to man made problems (like last year's oil spill in the Gulf of Mexico) can impact your income, as well as prevent you from accessing your money. You need to be ready for these situations.

Build Up an Emergency Fund

An emergency fund is there for…emergencies. You should build one up so that you are prepared. Your emergency fund can help you pay for repairs not covered by insurance, and it can also help you offset other costs that might be related to a natural disaster. Another reason an emergency fund is important is that your income might be interrupted by a disaster. What happens if you can't get to work? Or if the disaster results in you being laid off altogether? If some sort of catastrophe knocked out the Internet in my locale, I'd experience a severe drop in income. An emergency fund can help you avoid complete financial disaster in such circumstances. Take some time to get your finances in order, and start an emergency fund.

Keep Emergency Cash at Home

As nice as an emergency fund is, you should realize that power outages and interruptions in the banking system can limit access to your money. An earthquake once made it impossible for me to get my money via ATM for two days. Realize, too, that a lack of power or downed phone lines can mean that using a credit card might be out. Have a stash of cash at home, kept in a safe place. Don't use it for every day expenses; instead, save it for when you really need it. Consider three days' worth of cash to complement your 72-hour kit.

Know Important Numbers, And Protect Your Financial Documents

In addition to making sure that you have access to liquid funds, you need to consider your financial documents, and your financial accounts. Keep a list of financial account numbers and contact information for insurance policies, retirement plans, bank accounts, loans and credit cards. This list should be kept someplace safe and secure, along with hard copies of documents, such as insurance policies, loan papers, car and home titles, passports and birth/marriage certificates. A waterproof fire safe is one of the best options for these papers. You can even keep some of your emergency cash stash in the safe. That way, your most important information is safe guarded.

What If You Have to Leave?

Your next concern should be whether or not you have to leave. Your emergency stash of cash should be easy to get to, so that you can take it with you. Account numbers and other information should also be taken with you, just in case you need to get in touch with representatives of different companies. Have a 72-hour kit prepared for each member of your family (or create a family kit), and keep it somewhere accessible. These are things you need to grab and take with you in addition to cash and financial account information. You also need identification (if you have a passport, bring it along) and insurance cards.

Make sure everything you need is in a central location so that you can just grab it and go.

Do you have any other tips for financially preparing for a disaster?

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