Emergency Fund Bunk!
Who hasn't seen it? You read it everywhere; you should have 3-6 months worth of expenses put away as an Emergency Fund for unexpected financial expenses.
The problem is, that for so many people who don't yet have an emergency fund, once they determine how much money they'll need to fulfill that 3-6 month recommendation they become paralyzed from taking immediate action to start funding because they tend to think their monthly deposits would be futile and the ultimate funding goal would take literally years to reach.
For many people, fully funding their emergency fund will take years but, their monthly deposits can be thought of as far less futile if they have a progressive set of goals to reach along the way to fully funding their account.
These funding goals are dollar amounts that you can work towards when building up your Emergency Fund. Please note – most of these figures are based upon my own personal situation but every goal dollar amount can be easily converted to create your own Emergency Fund goals ladder. These goal amounts are based on paychecks, interest earned and individual expenses or bills we encounter on a monthly basis. Also, even though it’s not fully listed below, I tend to use every $100 increment as a goal and I have several savings and checking accounts primarily used as a backup to my primary checking account so, for each account I can use the $100 increment goals and that can also be done for the total of all the accounts.
$1 - first establishing an emergency fund can take as little as a single dollar. HSBC, Emigrant Direct and ING Direct all offer savings accounts which can be started for only a dollar.
$73 – amount of money needed at 5% to earn .01/day in interest.
$100 – first delving into triple digits, may not be much to write home about but it is certainly better than not having an emergency fund which means your balance is $0.00
$240 – with a 5% rate of return, this is the amount of money needed to earn (on average) $1/month from your savings account. This is a fairly easy calculation. Basically, you take the amount you want to earn per month and multiply that number by 12 to give you a yearly return and then take that yearly amount and divide it by the rate of return (APR and not the APY) on your savings account. In this case we take $12/.05 which equals $240. This is a pretty quick and fairly accurate calculation because most accounts are credited on a monthly basis so compounding isn’t really a factor.
$260 – amount needed to earn 0.25/week at a rate of 5%
$325 – equivalent to a car payment
$400 – 6 months of car insurance – don’t we generally get a break on the total we pay for our car insurance if we pay it all at once instead of in installments?
$480 – amount needed to earn $2/month at a rate of 5%
$500 – Milestone Amount! A figure to be proud of – also, relate this in your mind to know that you can now avoid using a credit card even for things like new tires for your car or most basic car repair.
$510 – amount needed to earn 0.50/week at a rate of 5%
$570 – this is the mortgage and fees on my condo – lose your job? Well, at this level at least you’ll know you have a place to live for at least another month.
$720 – amount needed to earn $3/month at a rate of 5%
$730 – amount needed to earn 0.10/day at a rate of 5%
$780 – amount needed to earn 0.75/week at a rate of 5%
$825 – amount equivalent to a paycheck! I get paid twice a month and each paycheck can be directly deposited into a maximum of three different accounts. This is the amount that is put into a checking account which I use to pay all my bills. An amount saved equal to one of your paychecks is a very good feeling!
$960 – amount needed to earn $4/month at a rate of 5%
$1,000 – Milestone Amount! Big Congratulations! 4 digits! This is a HUGE milestone, especially if you’ve never had a well defined emergency fund before. Just think of all the unexpected financial surprises that can come your way and now be dealt with without having to pull out a credit card or dip into a retirement fund! This is the dollar amount recommended by Dave Ramsey to hit first before delving full force into eliminating any debt you may have and it’s probably a reasonable amount of cash to have on hand to help stave off any further incursions of debt (particularly credit card debt) but personally, I know that my car insurance is coming due soon so I’ll want to continue to increase my savings so even after my insurance is paid I’ll still be at the $1,000 mark. Of course, Dave Ramsey recognizes this in his book and states quite clearly that things like car insurance coming due are NOT emergencies since we know well in advance how much and when those expenses come due but, if we are in the initial stages of building up an emergency fund then where else would the money be to cover infrequent expenses such as car insurance or anything else, if not here. So we continue … Incidentally, $1,000 also earns us an extra $50/year in interest!
$1,095 – amount needed to earn 0.20/day at a rate of 5%
$1,040 – amount needed to earn $1/week at a rate of 5%
$1,200 – amount needed to earn $5/month at a rate of 5%. This is a particularly attractive amount of money to earn each month because we have now moved away from earning amounts that can only be expressed by using single dollar bills to an amount that can be expressed with a single $5 bill. This amount also provides substantial justification for thinking about larger bill amounts that can be earned on a monthly basis via our savings. If $1,200 gives us $5/month then $2,400 gives us $10/month and $4,800 earns us $20/month. Who doesn’t LOVE to find an unexpected extra five, ten or twenty dollar bill in their pocket when cleaning or doing laundry? The fantastic aspect here is that we may now start to *expect* this kind of extra money each month due to our savings efforts.
$1,440 – amount needed to earn $6/month at a rate of 5%
$1,500 – Milestone Amount!
$1,650 – equivalent of two paychecks saved …an entire extra month worth of paychecks ready and available at a moments notice!
$1,680 – amount needed to earn $7/month at a rate of 5%
$1,825 – amount needed to earn 0.25/day at a rate of 5%
$1,920 – amount needed to earn $8/month at a rate of 5%
$2,000 - Milestone Amount! This is a fun situation to be in because if, for instance, $1,500 is enough to stave off incurring additional debts then we might start to consider using $500 from our Emergency fund account to open a short term Certificate of Deposit to garner some higher rates of return on our money. So, instead of our $500 earning $2.08/month at a rate of 5% we could earn possibly earn $2.21/month if our CD paid a rate of 5.3% Now, you might ask, why go to all the trouble of opening a CD for an extra 0.13/month? There are two reasons, one is more psychological and the other somewhat practical. From a psychological aspect, if we open a 3 month CD then we know that in addition to our regular monthly savings and thus, a probable higher savings total 3 months from now, we will also have a window of opportunity open up when the $500 we put into the CD becomes available to use at our discretion – basically, it’s another one of those good feeling benefits which comes from knowing that in addition to monies immediately available you will also have a decent chunk of money at your disposal at a predetermined rate in the future. Pragmatically speaking and from personal experience I’ve noticed much better unsolicited credit card offers come in the mail. Naturally these offers are tailored to the recipient and will vary but in any case there still should be an improvement in terms and conditions.
$2,080 – amount needed to earn 2/week at a rate of 5%
$2,160 – amount needed to earn $9/month at a rate of 5%
$2,400 – amount needed to earn $10/month at a rate of 5%
$2,475 – amount equal to three paychecks!
$2,500 - Milestone Amount!
$3,000 - Milestone Amount!
$3,300 – amount equal to 2 months worth of paychecks! 4 paychecks total.
$3,300 – amount equal to four paychecks!
$3,600 – amount needed to earn $15/month at a rate of 5%
$4,000 - Milestone Amount!
$4125 – equivalent of 2.5 months worth of paychecks or 5 paychecks total.
$4,500 – Milestone Amount!
$4,800 – amount needed to earn $20/month at a rate of 5%
$4950 – equivalent of 3 months worth of paychecks or 6 paychecks total.
$5,000 - Milestone Amount!
$5,200 – amount needed to earn $5/week at a rate of 5%
To be certain, this isn’t a list I compiled first and then set about achieving but it does accurately illustrate many of the different goals and benefits to be derived from attaining each goal along the way. I more closely focus on the level of savings I’m at and then tend to relate it to a specific aforementioned dollar goal. As you can see, if you consider enough aspects to what an Emergency Fund or any savings account can provide then you should be able to figure many goals well within $100 of achieving at any given time.
So, if your budget is still under construction or you don’t have an exact figure for your monthly expenses you can still get started on an Emergency fund and have discrete dollar amount objectives to be shooting for in any given month instead of a hazy dollar figure which, even if estimated is probably so large an amount as to detract from taking immediate action because it’s hard to realize the benefits.
The problem is, that for so many people who don't yet have an emergency fund, once they determine how much money they'll need to fulfill that 3-6 month recommendation they become paralyzed from taking immediate action to start funding because they tend to think their monthly deposits would be futile and the ultimate funding goal would take literally years to reach.
For many people, fully funding their emergency fund will take years but, their monthly deposits can be thought of as far less futile if they have a progressive set of goals to reach along the way to fully funding their account.
These funding goals are dollar amounts that you can work towards when building up your Emergency Fund. Please note – most of these figures are based upon my own personal situation but every goal dollar amount can be easily converted to create your own Emergency Fund goals ladder. These goal amounts are based on paychecks, interest earned and individual expenses or bills we encounter on a monthly basis. Also, even though it’s not fully listed below, I tend to use every $100 increment as a goal and I have several savings and checking accounts primarily used as a backup to my primary checking account so, for each account I can use the $100 increment goals and that can also be done for the total of all the accounts.
$1 - first establishing an emergency fund can take as little as a single dollar. HSBC, Emigrant Direct and ING Direct all offer savings accounts which can be started for only a dollar.
$73 – amount of money needed at 5% to earn .01/day in interest.
$100 – first delving into triple digits, may not be much to write home about but it is certainly better than not having an emergency fund which means your balance is $0.00
$240 – with a 5% rate of return, this is the amount of money needed to earn (on average) $1/month from your savings account. This is a fairly easy calculation. Basically, you take the amount you want to earn per month and multiply that number by 12 to give you a yearly return and then take that yearly amount and divide it by the rate of return (APR and not the APY) on your savings account. In this case we take $12/.05 which equals $240. This is a pretty quick and fairly accurate calculation because most accounts are credited on a monthly basis so compounding isn’t really a factor.
$260 – amount needed to earn 0.25/week at a rate of 5%
$325 – equivalent to a car payment
$400 – 6 months of car insurance – don’t we generally get a break on the total we pay for our car insurance if we pay it all at once instead of in installments?
$480 – amount needed to earn $2/month at a rate of 5%
$500 – Milestone Amount! A figure to be proud of – also, relate this in your mind to know that you can now avoid using a credit card even for things like new tires for your car or most basic car repair.
$510 – amount needed to earn 0.50/week at a rate of 5%
$570 – this is the mortgage and fees on my condo – lose your job? Well, at this level at least you’ll know you have a place to live for at least another month.
$720 – amount needed to earn $3/month at a rate of 5%
$730 – amount needed to earn 0.10/day at a rate of 5%
$780 – amount needed to earn 0.75/week at a rate of 5%
$825 – amount equivalent to a paycheck! I get paid twice a month and each paycheck can be directly deposited into a maximum of three different accounts. This is the amount that is put into a checking account which I use to pay all my bills. An amount saved equal to one of your paychecks is a very good feeling!
$960 – amount needed to earn $4/month at a rate of 5%
$1,000 – Milestone Amount! Big Congratulations! 4 digits! This is a HUGE milestone, especially if you’ve never had a well defined emergency fund before. Just think of all the unexpected financial surprises that can come your way and now be dealt with without having to pull out a credit card or dip into a retirement fund! This is the dollar amount recommended by Dave Ramsey to hit first before delving full force into eliminating any debt you may have and it’s probably a reasonable amount of cash to have on hand to help stave off any further incursions of debt (particularly credit card debt) but personally, I know that my car insurance is coming due soon so I’ll want to continue to increase my savings so even after my insurance is paid I’ll still be at the $1,000 mark. Of course, Dave Ramsey recognizes this in his book and states quite clearly that things like car insurance coming due are NOT emergencies since we know well in advance how much and when those expenses come due but, if we are in the initial stages of building up an emergency fund then where else would the money be to cover infrequent expenses such as car insurance or anything else, if not here. So we continue … Incidentally, $1,000 also earns us an extra $50/year in interest!
$1,095 – amount needed to earn 0.20/day at a rate of 5%
$1,040 – amount needed to earn $1/week at a rate of 5%
$1,200 – amount needed to earn $5/month at a rate of 5%. This is a particularly attractive amount of money to earn each month because we have now moved away from earning amounts that can only be expressed by using single dollar bills to an amount that can be expressed with a single $5 bill. This amount also provides substantial justification for thinking about larger bill amounts that can be earned on a monthly basis via our savings. If $1,200 gives us $5/month then $2,400 gives us $10/month and $4,800 earns us $20/month. Who doesn’t LOVE to find an unexpected extra five, ten or twenty dollar bill in their pocket when cleaning or doing laundry? The fantastic aspect here is that we may now start to *expect* this kind of extra money each month due to our savings efforts.
$1,440 – amount needed to earn $6/month at a rate of 5%
$1,500 – Milestone Amount!
$1,650 – equivalent of two paychecks saved …an entire extra month worth of paychecks ready and available at a moments notice!
$1,680 – amount needed to earn $7/month at a rate of 5%
$1,825 – amount needed to earn 0.25/day at a rate of 5%
$1,920 – amount needed to earn $8/month at a rate of 5%
$2,000 - Milestone Amount! This is a fun situation to be in because if, for instance, $1,500 is enough to stave off incurring additional debts then we might start to consider using $500 from our Emergency fund account to open a short term Certificate of Deposit to garner some higher rates of return on our money. So, instead of our $500 earning $2.08/month at a rate of 5% we could earn possibly earn $2.21/month if our CD paid a rate of 5.3% Now, you might ask, why go to all the trouble of opening a CD for an extra 0.13/month? There are two reasons, one is more psychological and the other somewhat practical. From a psychological aspect, if we open a 3 month CD then we know that in addition to our regular monthly savings and thus, a probable higher savings total 3 months from now, we will also have a window of opportunity open up when the $500 we put into the CD becomes available to use at our discretion – basically, it’s another one of those good feeling benefits which comes from knowing that in addition to monies immediately available you will also have a decent chunk of money at your disposal at a predetermined rate in the future. Pragmatically speaking and from personal experience I’ve noticed much better unsolicited credit card offers come in the mail. Naturally these offers are tailored to the recipient and will vary but in any case there still should be an improvement in terms and conditions.
$2,080 – amount needed to earn 2/week at a rate of 5%
$2,160 – amount needed to earn $9/month at a rate of 5%
$2,400 – amount needed to earn $10/month at a rate of 5%
$2,475 – amount equal to three paychecks!
$2,500 - Milestone Amount!
$3,000 - Milestone Amount!
$3,300 – amount equal to 2 months worth of paychecks! 4 paychecks total.
$3,300 – amount equal to four paychecks!
$3,600 – amount needed to earn $15/month at a rate of 5%
$4,000 - Milestone Amount!
$4125 – equivalent of 2.5 months worth of paychecks or 5 paychecks total.
$4,500 – Milestone Amount!
$4,800 – amount needed to earn $20/month at a rate of 5%
$4950 – equivalent of 3 months worth of paychecks or 6 paychecks total.
$5,000 - Milestone Amount!
$5,200 – amount needed to earn $5/week at a rate of 5%
To be certain, this isn’t a list I compiled first and then set about achieving but it does accurately illustrate many of the different goals and benefits to be derived from attaining each goal along the way. I more closely focus on the level of savings I’m at and then tend to relate it to a specific aforementioned dollar goal. As you can see, if you consider enough aspects to what an Emergency Fund or any savings account can provide then you should be able to figure many goals well within $100 of achieving at any given time.
So, if your budget is still under construction or you don’t have an exact figure for your monthly expenses you can still get started on an Emergency fund and have discrete dollar amount objectives to be shooting for in any given month instead of a hazy dollar figure which, even if estimated is probably so large an amount as to detract from taking immediate action because it’s hard to realize the benefits.
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