Wednesday, August 25, 2010

The Importance of an Emergency Fund

I'd be a liar to deny that I nearly had a full blown panic attack when I saw the status of our bank account this morning. Its not that I'd been completely oblivious to our financial situation. I know money is tight, I usually don't know exactly how tight though, because it doesn't make much of a difference to me. I just always try to save as much money as I can, in every way I can think of, so the exact status of our bank account doesn't really change how I conduct my life.

Why the Panic?

Today I looked at our bank account and definitely didn't like what I saw. My husband and I had been very vigilant about not using our debit card and only using the 200 dollars I drew in cash from the bank for the month plus whatever money I made from my cleaning jobs for all our spending this month, including groceries, transportation, some office/schooling supplies, birthday party shopping, etc. I wasn't expecting any hidden surprises because this month we were all cash, but I had forgotten that some bank errors had left a few months of checks we'd written un-cashed, so finally when all was sorted out, a huge lump of money was taken out of our account in one go. Suddenly, our account did not feel quite as comfortable as it had a week ago.

Don't worry. Its not that our account is empty, nor are we in danger of starving, so you don't need to feel pressed to send us a donation just so we have food to eat. (Though if you insist, I won't be stopping you.) Even if the money in our account gets finished up, we have a credit line/overdraft availability that we could use. (I don't know if I'm translating this correctly, but we have the ability to go "into minus" in our account, that is charged a relatively high interest rate.) However, after taking a loan to cover our overdraft so we'd finally be in the black after 3 years of living in the red, we promised ourselves that we'd do whatever it takes to never be in minus again.
We're not in danger of going into overdraft now. This month's rent is paid, our bills are paid, and I am well stocked on food. Its just that I'm thinking about the next little bit and about how long whatever money we have left will have to last us.

My husband gets paid hourly, and this month my husband needed to take a few days off for medical reasons, so our income is on the smaller side of average. Then the month of September is a month of many extra necessary expenses for us. To top it all off, its also the same month that my husband usually makes the least amount of money. In September, he can easily make as little as 525 dollars when our rent alone is 450 dollars.

Basically, the reason for my stress was because my husband's smaller than average paycheck he'll be getting on the 10th of September, together with the little currently in our account will pretty much have to last us until the 10th of November, aside for Mike's minuscule September paycheck. That would be pretty tough and I was having a hard time not freaking out.

All of a sudden I remembered- the savings account! Even though money is so darn tight for us right now, we make sure to put a set amount of money into savings each month, and that money is slowly adding up to something. All hope is not lost! You can breathe now, Penny.

Emergency Funds Are Important

The biggest financial gurus talk much about savings accounts and how important it is to have one.

When someone has no savings and unexpected large expenses come up or people suddenly lose some income, turning to credit cards is what many do. Its a very tempting thing, especially when you have no other option. How else will you pay for things when there is no money in the account to cover your expenses? So many people begin the bad spiral of credit card debt, the worst possible debt there is, from these emergencies that crop up.

If, however, you have an emergency fund, what you have is a way to save yourself during troublesome times. Picture your savings account like a credit card- a loan you're taking that needs to be paid back. Only this loan is completely interest free, can be paid back at whatever rate you'd like, and you're only borrowing money from yourself.

You don't want to be fishing into that emergency fund all the time. It'll be gone and then you won't have it when you need it. You want to make sure that there is always enough money there in case trouble creeps up. According to most experts, the suggested amount to keep in an emergency fund is enough money to cover 3 months of expenses.

With a paycheck the size of ours, it is definitely hard to save up enough money to live off of for three months, but whatever we've managed to save has become our emergency fund. No, its not tons, but it is enough money that I can breathe a little more easily now, knowing that should we not manage solely with the money in our account, we do have what to fall back on without needing to get further into debt.

If you're just starting an emergency fund and don't know where you'll get the money from, remember that something is better than nothing and that little pennies add up. Even if you can only put 50 dollars into savings each month (what we do), at the end of the day, you'll still have something there, which definitely helps.
If you're not sure where to get those 50 dollars, realize that if we, on our itty bitty income, can find 50 dollars a month and so can you! Nearly everyone has 50 dollars spare to put into savings, and if you can't find them, look harder. Cut, cut, cut! Go to extreme measures to find a few dollars here to save, a few dollars there to save, until you have those 50 dollars in your hand. If you think you're cutting back in every way you can, check out my extreme frugality posts for things you might not have considered.
You may be a little skeptical about doing some of the extreme money saving things I've mentioned and reluctant to try them out, but if you can't find 50 dollars to spare in your budget even when you're already trying to be frugal, you may just need to go to the extreme.
Having an emergency fund is an absolute must and absolutely should take first priority over anything else, even if that means stepping outside of your comfort zone. Once you build up a fully stocked emergency fund, you can chill off somewhat and take it a bit more easy, at least until you need to restock that fund.

Don't fall into the trap of thinking "Oh, I'll just keep that money in the regular account and not touch it" because you and I both know that such a plan does not work. If money is so easily accessible that just one swipe of a debit card or one trip to the ATM can diminish your "emergency fund", then it can't really be considered an emergency fund at all.
Put the money into a separate account, preferably one that gives interest, so that your savings will grow even more. Do not invest this emergency fund nor put it in an account that isn't easily accessible or you won't be able to utilize that money in the event of an emergency.

Start an emergency fund today! It can mean the difference between spiraling far into the gaping maw of credit card debt and living a comfortable life in which you're not worried (too much) about money.

Having an emergency fund allowed me to quit panicking when I realized what the story was with my bank account today. I'm so glad we found that 50 dollars monthly to save.

Do you have an emergency fund? How much money do you put in it each month? Do you have three months of living expenses saved up?
Have you ever had an experience where you ended up relying on credit cards in a lurch that an emergency fund could have eliminated? Please share.
Alternatively, have you a story about how your emergency fund prevented you from getting into financial trouble? I'd love to hear.
Has this post convinced you at all to start an emergency fund if you haven't already?

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