Tag Archives: emergency fund

Are you “financially fragile”? How to fix it.

According to a new study, nearly half of all Americans definitely or probably couldn’t come up with $2,000 in 30 days if they faced a financial emergency. Financial experts recommend keeping an emergency fund with enough cash to cover at least three to six months of expenses. Based on this research, it seems almost half of Americans would struggle to cover even one month in the event of a job loss or other emergency.

Considering the state of the economy over the past several years, this doesn’t surprise me. I have lived paycheck to paycheck in the past, and I know what it’s like when the money seems to leave your savings account more quickly than you can save it.

I truly believe that with some advance planning, though, most of these families wouldn’t be nearly as financially fragile. We were earning less than half of our current income when we finally began saving money. We went from barely squeaking by to saving a small amount of money every month without increasing our income.

By saving or earning an extra $160 a month, you could build a bare bones emergency fund of $2,000 (plus a little extra with interest) in one year. But how? Through a combination of spending less and/or earning more. Here are some ideas.

Spend less

Line-dry your clothing. The clothes dryer is one of the most expensive appliances in your home. By line-drying some or all of your clothing, you could noticeably reduce your electric bill.

Weatherproof your home. Seal drafty doors and windows with weather strips, update window treatments to insulating curtains or blinds, and take other steps to better insulate your home to cut your heating or cooling costs.

Add one or two vegetarian meals to your weekly menu plan. Reducing your meat consumption can make a huge difference in your grocery bill.

Lower monthly payments. If you have a lot of minutes left on your cell phone plan every month, you might be able to save some money by reducing your plan. Call insurance and utility companies to see if you qualify for any discounts.

Use Netflix, Hulu, and Redbox instead of cable for entertainment. Hulu costs anywhere from $0 to $8 per month. Netflix can cost as little as $9 a month. Cable costs $40 and up. You might be surprised how little you miss cable.

Downsize. Move to a smaller, less expensive house or apartment. Trade your fancy car for a reliable used vehicle with a lower (or no) payment. Become a one-car household.

Use cash for weekly expenses. This was the easiest thing I’ve ever done to cut spending fast. Set your weekly budget for daily expenses like gas, groceries, etc. At the beginning of the week, withdraw the amount of cash you’ll need. You’ll be amazed at how little you spend when you’re not unconsciously swiping your debit card several times a day.

Earn more.

Sell your stuff. Do you have shelves and shelves of DVDs and books and you don’t watch or read anymore? What about clothing you haven’t worn in years? Jewelry you don’t wear? Have a rummage sale or start liquidating your unnecessary assets at consignment shops, resale stores, or online.

Think like a teen. Clean houses, mow lawns, babysit. Start thinking of the ways you used to earn money as a teen. They may still be viable sources of income even as an adult.

Sell crafts on Etsy.

Find a part-time job for evenings and weekends.

I realize it’s easier said than done, but even if you can’t get to $160 or more per month, cutting expenses and earning more can help you start saving something, and that’s the first step to building your emergency fund.

What suggestions do you have for people who want to start saving to protect themselves from financial emergencies?

Photo credit

Our emergency fund is complete!

emergency fundTake a look at the progress bars in my sidebar! We’ve completed our emergency fund in just about 15 months and it feels FANTASTIC! Over the past year, we’ve saved about 30% of our income. Not too bad, huh?

We weren’t projected to complete it until next month, but I went ahead and moved some of our Europe fund into our Emergency fund to finish it up. Now we can focus on funding one savings account.

Over the weekend, we stashed our emergency fund in an ING 12-month CD. The interest rate on our ING Direct savings account has been steadily dropping since we opened the account. We started with a 3% interest rate, and about 15 months later it’s down to 1.3% and still dropping. With the CD, we lock in a 2.1% interest rate for 12 months.

I know what you’re going to say. Isn’t the Emergency fund supposed to be liquid savings? Doesn’t a CD smack you with penalties for early withdrawal? Well, here’s the thing: The penalty for early withdrawal is 3 months of interest regardless of when we withdraw. So the penalty is the same if we withdraw tomorrow or 11 months from now. If we leave the money alone for 12 months, we’ll earn at least an additional $80 in interest. Worst case scenario, we have a catastrophe and we have to withdraw early. If that happens, we’ll lose a little of that extra interest.

Based on my calculations, 3 months of interest would equal about $20. So even if we withdraw early, we’ll still make about $60 more with the CD than our regular savings account (and that’s if our savings interest rate doesn’t continue to decrease, which is unlikely).

If we run into a little hiccup that requires us to move some money out of savings, we could always borrow from the Europe fund, which is still in a regular savings account, without any penalties.

The way I see it, if we have to withdraw from our CD a little early to cover our car insurance deductible, for instance, then so be it. We’ve really got nothing to lose. We’ll give up a little of that extra interest. So what? The money is still accessible in the event of an emergency, and we’re not technically losing money that we invested. Just interest, which would be fine with me if it was a true emergency.

Another reason we made the decision to open the CD is to protect our savings. Now that we’re banking primarily with ING, it’s a little too easy to move savings into our checking account. I wanted an added layer of deterrent for us to leave it alone now. There’s no way I’m giving up 3 months of interest just because I want to buy something.

This is our second milestone (the first was paying off all of our credit card debt), and it FEELS GREAT. When we first started our emergency fund, I felt so overwhelmed. Our budget was so tight, how could we manage to save such a large amount of money? But I have to tell you, it is so worth the scrimping. Since I opened our emergency fund, I’ve turned into a savings junkie. I love the feeling of looking at our account, and feeling secure in the knowledge that we can handle anything that life throws our way. It’s so empowering.

If you haven’t opened an emergency fund yet, why don’t to grab one of my referral links and get started? :)

Photo by endlessstudio