Thanks for stopping by Club Thrifty! Our last giveaway was such a success that we decided to try it again. Please read on and find information about our current giveaway at the end of this article.
Whether it is a flood or a financial crisis, in order to weather the storm you must be prepared.
Over the last few days, we have watched with horror as Hurricane Sandy has roared up the East Coast of the United States. We have seen the devastation that a storm can cause, both in a physical sense and in an emotional one. Some of America’s largest cities have been severely damaged. The power of nature is truly an awesome sight to behold.
As with any big storm, scores of people decided either to ignore the evacuation warnings or had no choice but to ride the storm out in their homes. Now, there are tens of thousands of people trapped. There are millions of people without electricity. Unless they prepared properly, many of those people are without food or water. Federal, state, and local governments are scrambling to provide these people with the aid that they need in order to survive the next few days.
While there is obviously no way that humans can stop a huge storm like this from affecting their homes, individual people and families do have the opportunity to prepare for such an event. If somebody plans to ride out a storm, they need to stock up on certain items in order to ensure their survival. In the event that aid can not reach them for several days, or even weeks, those that chose to ride the storm out had better hope that they prepared properly for that variable.
The same is true for people who are experiencing a financial storm in their own lives. While it is not always possible to avoid a personal financial crisis, it is important for every one of us to prepare for the possibility of one. How do we do that? The key is simple. We all need to have an emergency fund.
What is an Emergency Fund?
One of the major reasons that many people never seem to have any money is because they fail to prepare for simple financial emergencies. Rather than saving money for unexpected events, they spend all of their money each month. When the furnace breaks or they need an immediate repair to their car, it wipes out their savings. That is why it is important for everybody to have an emergency fund.
An emergency fund is essentially a savings account from which you only pay for things in the event of a financial emergency. Your emergency fund money can be kept in a separate account or it can be mixed with your regular savings. If you choose to do this, you must be sure to not spend your emergency fund money on other expenses. You should have a “floor” in mind for your savings account balance and not let it dip below that number, replacing any money spent as soon as possible. Either way, this money should be placed in an account that is liquid. In other words, you should not invest your emergency fund money in stocks or mutual funds – both because they are illiquid and because you do not want to put your emergency fund at risk.
How Much Money Do I Need in My Emergency Fund?
The trick to having an emergency fund is to have enough money for emergencies but not so much so that you are missing out on making additional money through investments. Ideally, your emergency fund would include 6-12 months of living expenses. Therefore, if you experience the ultimate financial storm of losing your job/income, your living expenses are covered for 6-12 months. That should give you time, hopefully, to find another job and get back on your feet. This also means that you will need to complete a written budget so that you know exactly how much your monthly living expenses so that you’ll know how much to save. In addition, any money from your emergency fund that is spent should be replaced as soon as possible.
Until you have fully funded your emergency fund, you should allocate money for it in your monthly budget. Building an emergency fund takes time, and you may need to do it in increments. We recommend that you start with a small emergency fund of $1,000-3,000. Once you have your starter emergency fund, we recommend that you pay off all of your consumer debt before attempting to fund your 6-12 months of living expenses. Then, once you are debt free (except for the mortgage), you should begin to stuff money into that emergency fund until it is fully funded. At that point, you will know the peace that comes with being able to weather almost any financial storm.
Yay! Another Giveaway!
Now that you know why an emergency fund is important, we’ve decided to give you a kickstart to building that fund! Along with several other blogs, we are participating in another giveaway. We know that Christmas is coming and that it will be hard to start saving. So, instead of spending your own money, why not spend “ours” and start an emergency fund instead? There is a cash prize of $100. The winner can choose to have it sent to you via Paypal or in the form of an Amazon gift card. To enter, simply subscribe to our blog and register below. Then, follow our friends’ social media accounts and earn more chances to win. The giveaway is running from now through November 10. Find more details below and thanks for stopping by Club Thrifty!
(If you are a blogger and are interested in joining future giveaways, please click the link for more information.)
(Photo credit US Geological Survey)
About Greg
What investment vehicle do you hold your emergency fund in? Obviously having access when needed is important, but dropping it in a savings accounts could cost you a lot when you consider the opportunity cost of not having it in an investment with a higher return. Thoughts?
Mandy @MoneyMasterMom recently posted..Halloween on the Cheap
Our emergency fund is in our savings account. Yes, we could invest it but then it wouldn’t be an easily accessible account. I think that is the price we pay for having some money set aside just for emergencies.
I’ve saved for periods in my life where I knew my income would be limited. I’ve run into situations where I thought it would have been nice to have an emergency fund. But I’ve never been prepared when the unexpected happened. Which is why we’ve started getting serious about this.
Great giveaway! Thanks!
femmefrugality recently posted..Happy Halloween! A little bitta link love.
Hope you win!
I don’t think its too fair to say they purposefully ignored the warnings. I think many people just didn’t have anywhere to go. When you’re all alone in the city, where are you supposed to go when you’re not sure of the severity of the storm?
Veronica @ Pelican on Money recently posted..The Thank You Letter that Landed a Job
I can agree with that. Also, some people may not have had any money to leave and go anywhere.
I didn’t mean to infer that those people did anything wrong. I certainly am not blaming the victims. If it is coming across like that, perhaps I’ll go back and rephrase that.
We’ve never had an emergency fund over $1000 and it’s a struggle to keep it at that. Household things like plumbing/electrical problems are generally what we’ve used it for, but we do realize we need a “household upkeep” fund. Wish we had more cash flow to make it happen!
I hear ya! That would certainly make things easier!
Geez…there is a ton of you posting about emergency funds today and taking part in this giveaway! I’m burnt out on emergency funds now. lol. What a great giveaway though and an opportunity for somebody to win $100!
Jason recently posted..Recipe: Stuffed Acorn Squash with Quinoa
Yeah dude. All the cool kids are doing it
":)"We’re like you guys and keep our emergency funds as a buffer in our savings accounts. It’s currently at 6 months of expenses, which we feel pretty comfortable with.
Mrs. Pop @ Planting Our Pennies recently posted..Income Inequality In Relationships
That is great! 6 months is a comfortable feelilng, isn’t it? We are about 9 months, and it feels great “:-)”
We keep 1/2 of our emergency fund in a regular savings account at a local brick and mortar bank. The other half is in an online savings account with a slightly higher interest rate. This does two things for us. First we’re able to take out from the brick and mortar at a moments notice at a slightly lower interest rate.
The online account gives a slightly higher interest rate, however it also takes a few days to wire the money. So if we need the other half of the money we really need to think it through. It keeps us from using our funds for impulsive reasons.
justin@thefrugalpath recently posted..Giving Gifts at Work: Where do You Draw the Line?
That is a good plan, provided that you aren’t gunshy about taking it out if you really need it and use debt instead.
We use ING for our ER fund. It is accessible and still collects a bit of interest for when we don’t use it. It works pretty good.
Miss T @ Prairie Eco-Thrifter recently posted..7 Steps To Homelessness And What To Do If You Get There
I’ve never used ING. I’ve heard they are a decent place though.
Wow another giveaway, that’s awesome! Emergency funds are difficult because I think people quickly get overwhelmed with trying to save a large sum all at once. Breaking it up into a smaller initial goal of 1-3k, as you said, is a much better approach.
DC @ Young Adult Money recently posted..When a Renovation/Addition is NOT Worth It
I agree. If you break it up it doesn’t seem so daunting.
Popular opinion used to be to save 3-6 months of living expenses in a emergency savings account. I agree with your opinion of 6-12 months. Things have changed now and getting a new job is not as easy!
Jason Clayton | frugal habits recently posted..Great Reads of the Month (Monthly Roundup for October – 1st Addition) + a Video to bring in November with a smile
Yeah. I tend to be on the conservative side of that. I’d rather have more than less, especially with the uncertain job conditions right now.
We have our emergency fund in an HSBC online savings account. The interest rate used to be better than it is currently… I haven’t used it yet, and hopefully I won’t have to!
CF recently posted..Updates: October 28 – November 3
It’s funny that 1/2 of America has no emergency savings and the other 1/2 has too much. I see very few families with the correct amount in the emergency savings.
funancials recently posted..Made in America
Saving Emergency Funds is a very daunting task. It could be because many people live for instant gratification. Instead of even making small savings, they will go buy a coffee with the “spare change”. Luckily, though my bank, everytime I make a transaction, a certain amount of money gets transferred into an emergency account. It’s not much (50 cents), but it adds up quickly.