Monday, December 5, 2011

Grow Your Emergency Fund

It is so difficult to save for your emergency fund when there are so many things competing for your hard earned cash.  The bills, mortgage or rent, student loans, vacations, retirement, saving for kids' college, etc etc.  But if you don't have any sort of emergency fund, or at least 6 months expenses socked away, this should be at the top of your priority list.  Yes, even over paying down debt--especially if you have kids or a spouse depending on your income. 

The first step to growing your emergency fund is figuring out exactly how much you can contribute.  This is where I have to use that nasty little word... BUDGET.  If you don't have a budget it will be very hard to determine how much you have available to devote every week/month/year to your savings goals.  Without a budget, you're most likely just spending without a plan until your bank account is empty, or until you get your next paycheck, with absolutely nothing to show for it and little to no safety net.  You work hard for your money so you should fight to keep it.

If you don't have any room left in your budget for saving, cut those unnecessary expenses right away (ahem...manicures, lottery tickets, booze, eating out..these are just a few of those money wasters.)  Check out the blog Budgets are Sexy for his "Side Hustle" series of posts on ways to earn extra money.  Sell some stuff.  Pick up an extra shift or work some overtime.  If you aren't sure if this is an option, remember that your boss can't read your mind and you have to let them know you're interested in extra work.  Do anything (other than gambling) so you can start saving for something.

These are a few of the tactics we use that are helping us build our savings as rapidly as possible.

We automate our savings.  Every payday we sweep money straight into our various ING Direct savings accounts.  This way it never gets seen, therefore never gets spent.  We can always modify the amount, or cancel the transfer completely if absolutely necessary (if a car repair comes up, for example.)  But it psychologically hurts to do that, so we really have to think about it before making that decision.  Yes, it does take about 15-30 minutes of work to set up an online account, then an additional 5-10 to set up each additional account, but once it's done, it's done.

We keep our larger savings account in a less convenient, less accessible bank.  There's a reason we have a majority of our money in an online account at ING Direct--it takes about 3-5 business days for any money we transfer to reach our brick-and-mortar bank. We also don't have a debit card for that account.  Because this account can only be accessed online and there is a waiting period for the transfer, it keeps us from doing quick transfers to cover budget shortfalls in our checking account (helping us keep on budget because we don't have that easily accessed cushion.) It also cuts down on the chances we'll be tempted to withdraw the money to splurge on a huge TV or a shiny new high-efficiency washer.  We do keep a smaller amount at the brick-and-mortar so it is more accessible in case of an emergency.

All windfalls go straight to savings.  Until it's fully funded, all extra money, whether from selling on Craigslist, product rebates, side hustles, tax refunds...everything goes straight to savings.  We don't use it to buy a new gadget or pair of shoes.  I would much rather have money in the bank.

We pay only the minimum payments on debts.  Yes, it may seem counter-intuitive because we're spending more on interest this way.  (Although, our interest rates happen to be pretty low.)  But what we all need in an emergency is liquidity and reliability.  Credit card companies can cancel cards or cut credit lines at any time, so those are not a reliable source in case of an emergency or extended unemployment.  Conserve your cash and put it into a savings account.  When it's fully funded, then you can plow through that debt in no time.

We avoid taking money out for anything that isn't a true emergency.  Sounds silly, but people do it all the time...use their emergency fund to cover expenses when they go over budget.  Hello?!  Car repair=emergency.  New clothes=not an emergency.  Trip to the hospital=emergency.  Trip to Vegas=not an emergency.  You get the picture.

No comments: