Jumpstart an Emergency Fund

Dec 3, 2015 by

piggy bankYou probably know the conventional wisdom on emergency savings: 3-6 months of income. I don’t agree with this standard advice, because none of us are “standard,” but I won’t argue that following it is better than setting aside nothing for emergencies!

How Would Americans Deal With Emergency Expenses?

We all like to compare ourselves with others, especially if we suspect we’re doing better than our neighbors. 🙂 The Pew Charitable Trusts recently released the second in a series of three briefs that explore how financial shocks and emergency savings are related to the financial well-being of families. Particularly for personal finance nerds like me, the brief offers lots of interesting stuff. But this chart in particular caught my attention:

How Americans handle financal emergencies

A few things jump out here:

  • Half of all the survey respondents would use credit cards, at least in part, if they “needed to come up with money within a month for an unexpected need.” Another third would “borrow money” from some other source. Borrowing money at credit card interest rates is likely to make a money challenge worse, not better. (Though it’s a lot better than borrowing from a payday lender, as up to 9% might do.)
  • A quarter of respondents would use funds from a retirement savings account. That might be okay if you’re over age 59-1/2. If not, you’d pay a 10% tax penalty—on top of any normal tax due—on an early withdrawal. (There are exceptions to the 10% penalty early withdrawal rule.)

Based on my experience as a certified credit counselor and questions I get from Money Counselor readers, I know that an unexpected emergency is one of the top reasons people get themselves into financial trouble so serious that years of struggle may follow or the money shock might eventually snowball into bankruptcy. I know for many it’s far easier said than done, but this is why building an emergency fund is fundamental to long-term money success.

5 Ideas to Start Growing An Emergency Fund

A well-intentioned aim to divert even a small chunk of each paycheck into an emergency fund sometimes just doesn’t work. Millions live paycheck to paycheck, just barely earning enough to pay basic living expenses. Sound like you? Here are a few ideas to jumpstart an emergency fund when 2016 rolls around in a few weeks:

  1. Launch your emergency fund next spring by depositing your tax refund into a new, dedicated bank account.
  2. Liquidate, liquidate, liquidate: recruit everyone in the household to scour your home for items to sell on eBay or through a garage sale. Again, channel all the proceeds into a separate bank account set up for your emergency fund.
  3. Give up a vice for one year. Smoking, drinking (alcohol or soda), gambling—many people spend hundreds or even thousands of dollars a year on these habits. Set aside one of your bad habits for a period, and every time you get the urge, drop what you would have spent on the habit into a big jar. Every week put the cash in the jar into a dedicated bank account.
  4. Cook your meals. When I adopted a whole foods / plant-based diet three years ago, I stopped eating out. Not because I wanted to, but because I had to. (As a result I lost 25 pounds and have never felt better—but that’s a story for another blog. 🙂 ). Since Ms. Money Counselor and I track our spending, I could compare our before & after dining out expense. By making nearly all of my meals at home, I cut our dining out expense by over half. Yep, the grocery bill went up a bit, but we still came out way ahead. Take a guess at how much you’ve spent monthly on non-homemade food, including ‘outside’ coffee, over the past three months. Start making all of your meals and coffee at home, and at the same time start an automatic payroll deduction to channel 75% of your typical monthly dining out expense directly into a dedicated bank account. (The extra 25% will cover your higher grocery bill.)
  5. It’s past time to cut the cable. We’re still wasting money on cable, but you don’t have to. I don’t know about you, but most of the time when I turn on the television, I conclude my cycle through the channels with “there’s absolutely nothing on.” Or I settle on something idiotic and waste another few minutes of my life. Just do a web search on “cut the cable” for loads of ideas for far better and cheaper entertainment than your cable company is providing. Then set up a payroll deduction to directly deposit your monthly savings into your emergency fund account.

Please add to the list! What are your ideas for jumpstarting an emergency fund?

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