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Fully Fund Your Emergency Fund Now

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EmergencyThe New York Times recently released a great series about consumer debt called The Debt Trap. One common thread in several of the videos is the devastating effect “emergencies” can have on your personal finances. A medical emergency, a job loss or cutback in hours, all of these emergencies were weathered, in the short term, with credit cards. In the long term, the credit cards charged high interest rates, piled on fees, and made it extremely difficult to recover. It’s like telling someone to pause for five minutes in the middle of a foot race so that you can strap on a 100 pound rucksack. You might catch up, but probably not.

This underscores the incredible importance of having an emergency fund. The economic climate is pretty rough right now. IndyMac went into conservatorship, Wachovia announced they were slashing 11,000 jobs, and the price of oil gyrates in the triple digits. The stock market is down and there’s a lot of red in those brokerage accounts. The last thing on most people’s minds is boosting that emergency fund. But now is the most important time to focus on your emergency fund.

In times of prosperity, it’s easier to weather emergencies without a plan. Bonuses are bigger, regular and OT hours are more plentiful, and there is less fear that you’ll lose your job. Boosting an emergency fund isn’t fun, but neither is crushing debt, bankruptcy, eviction, and the unfortunate feelings that come with it.

Feel your job is 100% safe? That’s great, but that’s actually not the most devastating emergency. About about half of all bankruptcies are the result of medical bills. You can’t predict the future, but you can prepare for it.

How To Start a Fund?

It’s very simple, get your check book, get your budget, and open an account at FNBO Direct (FNBO Direct review, or pick any one of these high yield savings accounts), they are currently paying 3.50% APY. If online banks make you uncomfortable, open one at your local bank. A fund at 0% APY is better than no fund at all.

You’ll want to save at least six months of expenses, which you can tell from your budget (you budget right???). Try to accumulate that over [insert comfortable time period here]. The faster you do it, by sacrificing some discretionary spending now, the better.

Another option is to ladder your emergency fund in certificates of deposit. One place that makes it very easy is ING Direct but their current rates are all in the 3.30% APY to 3.00% APY range, less than HSBC Direct’s standard high yield savings account rate, so I would put it in HSBC Direct for now.

What are you waiting for?

(Photo: c.violette.run)

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10 Responses to “Fully Fund Your Emergency Fund Now”

  1. Elsie says:

    While I understand the importance of having an emergency fund (with 6+ months expenses), I have always wondered if that was supposed to be separate from a savings account. I know you can put your emergency fund money in a savings account, but are you supposed to have a separate savings account in addition? Thanks for any info you can share.

  2. Jon says:

    Ideally yes, the two should be separate in theory, but keeping them together would be better as far as gaining interest is concerned. So, keeping a savings account that included all of your funds as well as deliniating what you would need (within said account) in the case that an incident that an emergency fund might be required for might arise would probably serve you best.

  3. Jon says:

    I must admit that I haven’t explored the ING subaccount options. Are they considered as part of your main savings account, and do they therefore garner the same interest rate? If so, that is a good option for separating funds.

  4. Jon says:

    Of course, Jim’s suggestion of laddering CDs might even be a better idea if it is feasible in anyone’s particular situation. :)

  5. Jason says:

    Jon, how would keeping them together be better as far as gaining interest is concerned?

  6. Jon says:

    Jason, it wouldn’t, I was screwing up the concept of compounding interest in my head when I typed that (I had a few beers). Elsie, if your read that, I apologize for the misinformation.

    Jon

  7. Gary Hardin says:

    Thanks for encouraging readers to keep an emergency fund. The economic challenges today can crush a family who doesn’t have some spare money to take care of unexpected expenses. We discovered a couple of weeks ago our roof is leaking, and needs to be replaced. Thankfully, we have the money for a new roof in the bank (thanks to our emergency fund). If we have not disciplined ourselves to have an emergency fund, we would be in a state of panic right now, and worse, we’d have to borrow the money to replace the roof.

  8. jim says:

    Hey Gary, I just replaced my roof too and you might be able to get a 6 or 12 month 0% same as cash financing. That will give you ever more time so you can boost up that emergency fund some more (or recover it before spending it).

  9. Evan says:

    Jim,

    Mymoneyblog just updated his %s for CDs and Savings accounts and I am posting what I posted to his readers:

    I would love an argument FOR the ladder cd taking into account my opinion:

    “I don’t get it! I have a dual system going similar to that of the author of this blog – using Wamu (3.3%) and ING (3.0%), and frankly I am confused.

    Lets say I have $20K in cash to chase rates with…I do not understand why I would put anything into a CD at today’s rates. Lets use the lower of the two, ING, as an example as compared to Bank of America’s CD.

    Lets assume I have $20K in my ING (which I don’t, but I wish I did lol) that equal approximately $600 in a year or more appropriately around $120 for 7 months ($20K * 3% = $600 then divide that by 7 for the months). Lets compare that to the Bank of America CD (20K * 4.11% = $822 then divide that by 7) = $476.

    $476 – $ 120 = $350 BEFORE TAXES…we will multiply that by lets say .72 (28% tax bracket) $256 AFTER taxes.

    I know this was all simplified math, but for $256 I will keep my liquidity. I guess the difference would be if we are talking about $100K but how often do people actually have $100K outright, i.e. not already working for them in the market.

    Sorry for the long post, but I want somebody to tell if I am missing something!”

  10. jim says:

    Evan: I agree with your assessment but we are in a scenario where interest rates are more likely to climb than fall. With rates where they are now and the economic climate, there’s 0% chance that the rate will fall so locking in that rate doens’t make sense.


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