Tag Archives: Emergency Fund

The Importance of an Emergency Fund

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EmergencyFund

The Importance of an Emergency Fund

I believe in the saying that we should always plan for the worst and hope for the best, and when you relate this to your finances it means having an emergency fund. An emergency fund is exactly what it says on the tin, it’s a source of funds where you can go to seek help in the event of an emergency.

Always expect the unexpected

You should always expect the unexpected when it comes to day to day life, as we never know what could be just around the corner. You should think of a financial emergency as either a sudden loss of income, e.g. loosing your job or an unexpected expense that’s unavoidable e.g. a burst water pipe at home.

If you don’t have an emergency fund

If you don’t have an emergency fund in the event of a financial crisis, then you may have to borrow money. Borrowing more money in this type of situation will only worsen your financial state; this is why having an emergency fund is so important.

How much should I put aside?

Emergency funds are often a hot topic of debate, but I believe that you should keep around 3 months worth of your personal expenses in your fund; this will depend on your own financial situation and how you much feel you will be able to comfortably save. The more money you add to your emergency fund the better as you should prepare for the worst. If you follow this method then all minor problems should be covered.

Make your fund work for you

Before you start your emergency fund you should ensure that you will be saving your money in the right place. Make your fund work for you by adding all your money into a high interest savings account. In the US a LSA or Lifetime Savers Account is one of the best ways to save. If you are UK based like me (this is a guest post, MoneyReasons is from the US), then the UK equivalent is the ISA rates account. Do your research and choose the best savings account in your local area. Make sure that you keep your emergency fund in an account that you can access quickly, so that you can withdraw money in urgent situations.

Get into the saving habit

When you start your emergency fund, it’s important to get into a saving habit so that you get used to it on a weekly or monthly basis. It will be difficult to start saving, especially if your aim is to save around 3 months of personal expenses, but start small and you will soon get used to it.

Set up some automatic payments

The easiest way to get in to the saving habit is to set up small automatic payments. Once you have opened up your savings account, set up a transfer of funds at set intervals from your normal bank account. Treat the amount you transfer as just another expense and you will soon forget about it. Once you are comfortable with the amount you are transferring, increase the amount slightly, repeat this process until you are happy with the amount you are saving.

Set up an emergency fund, and don’t let yourself get caught out by your own financial situation.

Guest post written by Andreas @ moneysupermarket.com

My Stealth Emergency Fund?

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Do I have a Stealth Emergency Fund?

I used to believe that I didn’t have an emergency fund, and I’ve commented on other blog sites stating that I didn’t have one too.  But really I do, but most people would not consider it a traditional emergency fund.

I estimate that I have over $15,000 that can serve as an “stealth” emergency fund if the need arises!

So what is included in my stealth, Emergency Fund?

  1. “Checking Account Buffer” – I keep $8,000 in my checking account as a buffer just in case I have a bad month in which I need to use more money than normal.  Usually, in December, my credit card bill is higher than normal and I dip a bit into this buffer to help pay off my credit card balance in full.  This amount would be used as my first line of defense against an emergency.
  2. Contributions to my Roth IRA – In my previous post called: Roth IRA Contributions versus Roth Investment Gains, I explain how you can withdraw your contributions at any time, up to the total that you deposited into your Roth IRA.  So while not a desirable action to take, if a true emergency is experienced, that money is available.

Of course, there is money in my brokerage account too that can serve as a fallback to the emergency money that is identified above.  In fact, any amount that I have in cash in my brokerage account would be used before my Roth IRA.

So in conclusion, I don’t have a traditional Emergency Fund, but I have enough in other money pools that they can serve as a sort of “Stealth” Emergency Fund.

I’m very happy with my current financial portfolio, but do you think I should still create a formal Emergency Fund, and why?  After all, I’m willing to bet that my stealth emergency fund is more than 70% of the population’s normal emergency fund…

-MR

Roth IRA Emergency Fund

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I don’t have a traditional emergency fund, so I decided once my mortgage is paid off, I’m going to use part of my previous mortgage payment savings to fund into my Roth IRA as an emergency fund.

My Roth IRA previously was used just for active trading in a few high beta stocks.  This was my “play the market” fun money.  I had a great time with it, and I did okay until the “Great Recession” hit.  Most of my Roth IRA money was and still is in solar and Chinese stocks.

Roth IRA Emergency Fund Plan:

I’m going to take 25% of the money that I’ll be saving by having my mortgage paid off in February 2010 and start to funnel it into a money market or bond fund in my Roth IRA.  After a few years, when the fund hits $15,000, I’m going to change my percentage ration to a smaller ratio.

Why am I doing this, you might ask?…

The Money Reasons 🙂

  1. Any interest or dividend received grows Tax Freeeeeee
  2. If I sell a security, and incur capital gains, they are also Tax Freeeeeee
  3. I can withdrawal my contributions to the Roth IRA without any penalty.
    1. Since the money has already been taxed, no taxes apply!
    2. No age limit applies to the contributions either!!!
  4. It’s simple to get to the money!  As long as I don’t tap into the earnings…

I will have to make sure if I withdrawal money in an emergency to only withdrawal what I contributed.   So I keep track of my contributions in a separate spreadsheet.

I’ve seen some advice about this not being the best route to take because of lost future gains.  But currently, the amount that I’ll be contributing will be above and beyond what I’m currently contributing.  By doing this, I also get to take advantage of a great legal tax loophole!  Plus I’m max out my Roth IRA contribution amount allowed by the government (currently 5,000 + inflation).

Using a Roth IRA is one of the only ways to get the interest rates that so many books and blogs reference.  After all, regular brokerage accounts get hit with taxes…

What  do you think of my plan?

MR