Beating Broke

Personal Finance from the Broke Perspective

Realized Benefits of Emergency Funds

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Here and on other PF blogs, you’ll hear us all talking about the need for a well stocked emergency fund.  And, unless you have one, you likely don’t know that we aren’t just saying that because we think we should.  They really do have the benefits that we claim they do.  These last couple of weeks, my wife and I realized those benefits.

Early on March 26th, my then pregnant wife told me that I should probably stay home from work as it was appearing very likely that we would be having a baby that day.  Less than two hours later, we were checking in to the hospital to do just that.  If you’ve been there, I don’t have to tell you that it was incredibly exciting.

The excitement waned as we waited for the labor to progress and then quickly disappeared altogether when the baby began having decelerations in it’s heart rate.  The doctor began making preparations and the birth was expedited.  Rather than wait for the labor to progress as it would normally, my wife was instructed to push with all she had to get that baby out.  Quickly afterwards, the baby (a girl!) was born, and just as quickly was taken to a warming table to be intubated and have her lungs and stomach suctioned and checked.

It turns out that sometime in the weeks leading up to her birth, she had *ahem* pooed in her amniotic sac.  To the medical world, it’s called Meconium.  And it’s pretty bad.  It affects the lungs in that it acts as a stopper for the little sacs that do the oxygen intake.  It also acts as an irritant to the lungs that can lead to infections.  It can be very serious, and can take days, or weeks, or months to completely clear out.

In our case, luckily or not, our little girl was able to kick it in a week.  Pretty average recovery time we’re told.  Now, she’s home and all is well.  There won’t be any lasting effects and we shouldn’t be able to tell the difference.

calculator stethoscopeHere’s where the benefits of an emergency fund come in.  For that week that our little girl was in the hospital, the last thing we wanted to think about was bills, work, or anything not related to the well-being of that precious baby.  We had friends watch our dogs, and my wife’s mother came up for a couple of days to watch our son.  And we spent as much time as we could watching our little girl fight the fight in an incubator.

We didn’t have time to balance our check book, or check our budget to make sure we were within bounds on something.  And now that it’s all over, I can honestly say that if we hadn’t had an emergency fund, it would have been much, much worse.

One of the touted benefits of an emergency fund is the peace of mind that it affords you.  When you know that you have that money to fall back on in an emergency, your mind is free to worry about the things that it should be.  In this case, it was our daughter.  Maybe it would be the car you just wrecked or the house that just burned down.  No matter what the emergency is, you know that you’ve got that extra cushion of money to help pay any bills or expenses that might come up.

I cannot tell you how wonderful it was to not have to worry about that during the week that she was in the hospital.  We certainly didn’t expect to have any problems, but we did.  You may not expect any problems, but they can happen.  If you’ve been putting off the funding of your own emergency fund, don’t wait any longer.  We’re glad we didn’t.  You never know when you’ll need it.

Photo Credit: forwardcom @ sxc.hu

How Much Should Your Emergency Fund Be?

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If you’re smart, and you are since you’re reading Beating Broke, you’ve got an emergency fund.  But just how much do you have in your emergency fund?  And how much should you have in that fund?

Ramseyan thought:  Start with a goal of $1000 and then after your bills are paid off, move it up to cover at least 6 months of expenses.  This is the current plan that my wife and I are using.  We built up our intitial fund of $1000 and have been letting it sit in our e-trade savings.  It’s just under $1050 at the moment and growing at about $2-$3 a month.  Nothing big, but much more than we ever had before.

Some will say that Ramsey is a little off on this thinking.  Many people, my wife and I included, couldn’t even make it a month on $1000.  Those same people would suggest that you build up a 1 month expenses emergency fund at the minimum.  They may be right.

The key here, is that we’re discussing personal finances.  It’s personal.  When my wife and I decided to take the reins and take control of our personal finances, we didn’t have an emergency fund at all.  We had just completed reading Dave Ramsey’s Total Money Makeover, so we followed (are following) his baby steps plan to get ourselves out of the hole.  We’re Beating Broke. (Do you like how I slipped that in there? 😉 )

The Beating Broke thought: Because we’re talking about personal finances, it’s important for you to gauge your risk and build an emergency fund that is appropriate.  Certain things will raise the risk of an emergency.  If you’re driving an old car, for instance, the risk of a breakdown is higher than if you were driving a newer car.  If you’re health is a little worse than average, the risk of you having a medical emergency could also be higher.

The higher your emergency risk, the larger your emergency fund should be.  I suggest starting with at least $1000.  It’s a good number, and for many, it’s more than what you already have.  If you can continue to grow that emergency fund without derailing your excess debt payoffs, do so.  Continue to build it until it is at least 3 months expenses.  In the end, shoot for a constant emergency fund of at least 6 months expenses.  Try to keep it to no more than 12 months though.

Why no more than 12 months?  Because you’re likely keeping it in a high-yield savings.  The 3-4% that they are currently paying is good, but you can do better elsewhere.  If you’ve already got 12 months of expenses in the bank, you can take any excesses and do much better through investments that will get you a higher return.  Presumably anyways.  History would say so, and it usually doesn’t lie.

Most importantly, you must have an emergency fund.  If you don’t then this whole article is pointless.  It will give you a peace of mind that you’ve been missing and make it easier to pay off your debt.

As usual, the advice here is merely that of a lowly personal finance blogger and not that of a financial professional.  Before making any big money moves, you should consult a professional.

Beating Broke Rules: Emergency Fund

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If I could use only one word to describe my thoughts on this it would be the word yes.  I went the first 26 years of my life without an emergency fund and I’ll never go another day without one.

The purpose of an emergency fund is to give you available funds in case of an emergency.  Your car breaks down and needs repair.  You fall and break an arm and have to take some unpaid leave.  Whatever the emergency is, your fund is there to see you through it.  It’s a great thing, and can take an immense weight off of your mind that you didn’t even know was there.

So where do you put your emergency fund?  A fluid account that you have nearly immediate access to.  I prefer to have it in a secondary account that is separate from my everyday account because that makes it that much harder to spend on silly non-emergencies, but where it’s still available if I need it for an emergency.  At the moment, I keep my e-fund(my pet name for it) in an Ally Bank interest checking account.  The interest rate is consistently in the top 10 or so and the service has been superb.

How much do you put in it?  Ideally, you’ll keep 3-6 months of expenses in your emergency savings.  If you’re just starting out with your debt plan, try for something between $1000 and 1 month of expenses.

Make your emergency savings a priority.  Until your reach your $1000 balance goal, you should be paying as much as you can into it.  The peace of mind that you’ll get by having the account is well worth the extra interest you’ll pay on your debt while your building it.