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| Build an Emergency Fund |
The practical reason for this fund is that if something happens to your job, you have a cushion to provide you time to find another job before you are in major trouble. The other, somewhat funny, reason was that if things get really bad at work, you can tell your boss "Go to Hell" and quit. This "Go to Hell" component was actually passed down from my grandfather. I chuckle every time I think about him possibly saying "Go to Hell" to his boss even though I don't think he ever did. Now, I want to make it very clear that neither Tony and I have any intention of doing this! We both love our jobs!
After reviewing our current expenses, we realized that we are not living on just one salary. This means that if something happens to either on of our jobs, by choice or not, we can't afford our current living situation. We need a cushion to allow us to live until we can find more work. What amount of cushion do we need? If you Google "emergency fund," you'll see recommendations from $1000 to a full years salary.
For us, we wanted to start with 3 months of expenses and eventually stretch to 6 months. When reviewing our budget, last year we averaged spending $9k a month. This number is heavily skewed because we dipped into our savings to pay for the down payment on our house plus everything for our wedding. When reviewing our budget this year, we are averaging ~$6k per month. This money includes everything that we spend along with what we save for home and car maintenance as well as vacations. So this means that our initial "Go to Hell" component, we need to save $18k. OH MY GOSH! This is terrifying! That's what the numbers say so that needs to be our first goal.
"Oh Shit, Something Broke" Component
This is pretty self-explanatory. With the purchase of our first home, there is no longer a landlord or rental agency to call if something breaks. For us, if something breaks, we've got to fix it or go without. In our house, there are several things that could break that would be an inconvenience but then there are those things that if they break, we're in serious trouble. I've broken the things in our house into three categories: Big Trouble, Inconvenience, and Really, Get Over It.
Big Trouble - Majorly effect the useof the home
- Boiler (depending on the time of year)- No heat!
- Hot Water Tank - No warm showers!
- Refrigerator - No cold food!
Inconvenience - Things that make living in the house easier but we don't really need it.
- Dishwasher - I've got two hands and a sponge
- Oven, Stove, Microwave - as long as I have one, we can make hot food.
- Washer/Dryer - there are Laundromats
Really, Get Over It - Luxuries that we really don't need
- Garage door opener
- Lawn Mower/Snow Blower
- TVs, PS3, Speakers, Alarm Clocks
- Small Kitchen Appliances - Toaster, Mixer, Keurig, Wine Fridge
Really the only things that would need to be replaced immediately are the items in the Big Trouble category. Of course, these are the most expensive things in the house. The Inconvenience category contains the things that I'd like to have replaced within a week or two. When looking at the Big Trouble category, the most expensive things are the boiler and hot water tank. We could be looking between $5-7k for a new one. The house is older and I think it's possible that we may need to replace one in the next year or two. This means, we need $7k just in case something goes wrong.
Here's the total... "Go to Hell" = $18k
"Oh Shit, Something Broke" = $7k
Emergency Fund Total = $25k
For now, we are working towards the total. Once we reach it, I know we will re-evaluate and up each component to give us 6 months of expenses and two major repairs. I'm trying not to think about that just yet... Baby steps.
The next question, is where do you keep this money. I've been placing this money into a money market account (MMA) for a couple of reasons.
1. I get a slightly better return on my money. (Tiered Rate 0.15-0.4% - MMA vs. 0.1% -Savings)
2. I am limited on the number of withdrawals a year. This keeps the money more off limits especially because it isn't accessible from an ATM.
3. It creates a barrier in my mind. MMA = Emergency = DO NOT TOUCH!
If you want to start your own emergency fund, here are my recommendations:
1. Determine your average monthly expenses.
2. Set aside $1000 to start and work your way towards your cushion amount. It could be 3 months, then 6 months, then a year of your expenses.
3. Open a separate savings or money market account. This will keep your emergency money away from your normal checking and savings accounts.
4. When you have enough saved up, investigate Certificates of Deposit (CDs) or other higher rate of return savings options.
5. Re-evaluate anytime your expenses change (buy a house, move, children)
Please let me know what you think! Do you do something different?
*DISCLAIMER: I am not a financial expert. Everything listed above is based on my opinion and experiences. All situations are different and if need, contact a financial planner.
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