Still No Emergency Fund? Really?
Posted by John Draper | Filed under Money Management, When Ca-Ca Happens
I routinely meet people who do not have an emergency fund. And I hear from hundreds more; sad souls who have hit a wall and have no money to help them over. I’m not sure what else I can say to influence them to get this very important part of their financial safety net in order other than this: Caca Happens. If you have some money available to help you through, things will be a lot less stressful than if you’re dealing with Caca and No Money at the same time.
It doesn’t really matter how well you think things are going. Like the economy, life is a cycle. Sometimes you’re on your way up the positive side. Sometimes you’re on your way down the negative side. That’s just the way life is. And it really shouldn’t come as any surprise at all since it has always been thus.
Building up an emergency fund is an important part of your Risk Management. But you already know that. It’s pretty standard advice from anyone who knows anything about money and life. You’re mother gave you a version of this lesson when she encouraged you to tuck a twenty somewhere safe when you were going off on a date so if things didn’t go well, you had the money to get home under your own steam. Your mother didn’t tell you that? Hmmm.
Sticking a twenty somewhere safe is still good advice. Except a twenty doesn’t really cut it when you have a $1200 mortgage payment, a $300 car payment, kids to feed, a home to heat, and medical costs that have to be covered
The biggest problem with not having an emergency fund is that when the caca does hit the fan you’re going to go into debt, or deeper into debt, just to meet your most basic needs. So an emergency fund is also a safety net against more debt. And an emergency fund can help you smooth out your budgeting because when unexpected expenses hit your doorstep, you don’t have to constantly be rejigging your budget to make it to the end of the month. You can use some of your emergency fund for the emergency, and keep your budget on track.
But Gail, I can hardly manage on the money I’m making now. Where am I supposed to get the money for an emergency fund?
Start small. If you don’t have much to save, it doesn’t matter — the important thing is just to start. Even if it’s only $20 per paycheck, start. As long as you haven’t started, you’re not building your emergency fund. Once you’ve started, you’re on your way and then it only becomes a matter of how to boost the amount you’re setting aside.
To create your emergency fund, set up an automatic deduction from your regular account to a high-interest savings account. Whether you go with ING Direct, The President, or your local credit union, find the account with the highest interest you can. Don’t settle for some pathetic savings account being touted as an “investment account” from your local bank. You work hard for your money, and your money should work just as hard for you.
One of the best ways to establish an emergency account is with a payroll deduction at work. This is particularly true for all of you people who have no discipline! Employers often offer the option of deducting some money from each of your pays and putting that money in a savings bond. There. You won’t even miss it since the money never hits your bank account. Of course you have to treat that money as sacred. If you pull the money out every time you Create A Stupid Emergency – gee honey, we really do need a new front door – then you’re playing a game with yourself, and you will LOSE!
Okay, once you’ve started your emergency fund, sticking away your $20, $30 or $50 a pay, you’re on your way. But you can’t pat yourself on the back just yet. Since the rule of thumb is that you need at least three months of Essential Emergency Expenses set aside, you must find a way to boost your savings to reach your goal in a reasonable period of time.
One way is to reduce what you’re spending in one category of your budget and send that money to your High Interest Savings Account. Most people have things they can cut back on. Do you buy coffee every day on the way to work? Do you smoke? Do you pick up the latest magazine at the checkout counter? Do you subscribe to premium cable? Do you go out for a drink with your friends after work? Buy your lunch at work? Pick up your favorite “stuff” whenever it’s on sale even though you already have 30 pairs of shoes, white shirts, handbags, DVDs, name your vice here.
One great tip I picked up from a regular visitor to the site is the Tit-for-Tat approach to savings. Each time this woman buys herself something she considers a WANT, she contributes an equal amount to her savings account. Not only does it make her really think about whether she’s going to spend the money – because in essence whatever she buys is going to cost her cash flow twice as much – she’s saving for the future while she enjoys her todays.
Assuming you’ve been working like a dog to get your debt paid off, once it is, don’t just incorporate all that money back into your spending plan. Take 30% and use it to boost your emergency fund. (If you’ve already hit your emergency fund goal, use that 30% for long term savings.)
Debt free with a safety net? Rock-on!
November 3, 2008 at 6:46 am
Gail, as usual you give very practical advice. We had the ‘caca hit the fan’ when our basement apartment’s tenant lost her job and could no longer pay the rent. Consequently they suddenly moved out (at this time of year it’s tough finding new tenants). So that’s money we no longer have coming in.
I am very thankful that we had been saving for our children’s university or we’d be hard press to pay our eldest’s tuition fees this fall. We only recently started saving an Emergency Fund. We took your earlier advice and signed up for an ING Tax Saving Account to ‘grow’ our emergency fund. ING’s giving double interest right now until the new Tax Account officially kicks in this Jan. We’re doing a monthly automatic debit of $100. It’s not a lot – but it’s a start.
We’re also using our President’s Choice Interest Plus account to save for a) our other child’s driving lessons & rugby trip to Washington, and b) my 50th birthday party this spring. We’ll continue to chip away at paying off our debts along this journey of life.
Best wishes for a stress-free week.
Doreen
November 3, 2008 at 11:49 am
Gail, I have had the best of intentions to start an emergency fund. You finally gave the kick in the butt I’ve needed to make it happen.
I opened another ING account designated for emergencies. I opened the new tax-free savings act. I’ll start with $20/pay and add to it after my next raise in January.
I have been doing very well all year saving into 2 accounts. One is for a car purchase and the other has been for household renos. I am saving $30/pay towards buying out my FIL’s car lease in 4 years time. Once we pay off our current car we will have enough extra cash to top up the account for the difference. The other account has allowed me to slowly buy items I would like to update my kitchen without using credit. I’m almost there so the money I was designating for that will move to the emergency fund.
Thanks!
November 3, 2008 at 12:16 pm
My only question is, how should all my savings be organized? Right now it is more or less in one big pot. I know that part of my savings should be designated as an emergency fund, but I also have savings for future needs – eg., I expect that in the next 5 or 6 years my partner and I will want to start a business, move to a bigger apartment and eventually buy a house, get married, start a family, and have some kind of lifestyle upgrade from the frugal existence we are eking out right now. I want to plan for, and have the money available for all of these things. In addition we are saving for emergencies. But right now all my savings are lumped together (We have only started to save in the last 5 months or so, after becoming debt free.) Should I seperate the money into different accounts?
November 3, 2008 at 12:21 pm
Boosting an emergency account:
1- cut back 10% of variable expenses and put into account
2- second job (temporary until you have your 3 months)
3- done paying for EI and CPP this year, put into savings account
4- done paying for car or credit card, put payments in account
5- job bonus
6- tax return
Reminders:
If you lower your living costs, your 3-months total is lower!
If you get rid of loans (car, LOC, …), credit card balances, etc (any manadatory payments or financial obligations), your 3-months total is lower!
Tax Free Savings Account begins January 1, 2009: switch your money as soon as you can!
November 3, 2008 at 1:05 pm
Saver Queen, I had the same problem. I came up with two solutions – one, keep a savings log book (date, amount deposited, what it was for). This would up being rather complicated and it meant a lot of work, even after I used an Excel spreadsheet. Now I use the other solution – free savings accounts (no charges except for withdrawals). So I have several. I use online banking, and I’ve nicknamed the accounts. (one is Christmas, another is house renovations). I’ve also set up automatic transfers. So on the first of the month, $20 gets put into Christmas and $15 gets put into House Renovations, for example. It’s so great to be able to log in and see what my totals are!
November 3, 2008 at 2:32 pm
This question is for a friend…
If you have debt, wouldn’t it make more sense to concentrate completly on paying off all the debt before creating the emergency fund?
November 3, 2008 at 2:48 pm
Alicia – thanks! That’s a great idea! I love that you’ve nicknamed them, too, so it’s obvious what you’re saving for and how much you’ve got for each. It makes it that much more difficult to blindly take money out of your emergency account for non-emergencies, too.
November 3, 2008 at 4:35 pm
it is because of gail that we have begun our emergency fund. i started contributing 10 dollars a week for 10 weeks. then i did 12 dollars a week for 10 weeks. then 15 dollars a week for 10 weeks…now i’ve just set up the automatic transfers to do 17 dollars a week. we have a very tight budget but by starting with such a small number it’s so easy to do!
our car actually had a flat tire and it was very nice to know that we had money set aside for unexpected occurences and that it would not have to go on a credit card or line of credit. there was no stress involved! what that incident has taught me is that we need to have another fund that is strictly for car repairs/home repairs. so, i’ve set up another account and automatic transfers! first i did 5 dollars a week for 5 weeks and now i’ve just set it up to do 7 dollars a week for 10 weeks.
it sounds so small…and perhaps to some it is…but to me these are big numbers and slowly but surely we are accumulating an emergency fund.
ioana–i believe gail advocates for paying into an emergency fund as well as debt repayment b/c if you put all your money towards paying off debt then when something goes wrong (ie. spouse loses job, car breaks down, roof leaks, you need a root canal) you have no savings to use for those events and you end up charging it on to a credit card or line of credit and thus the cycle continues.
November 3, 2008 at 4:48 pm
Dinah, I was just about to write what you wrote re: putting aside savings even though it means paying interest on money owed (which far exceeds the interest paid on savings) but in a previous posting Gail was pretty adamanent that it makes the most sense to always concentrate on paying down the debt with the highest interest rate and most people seemed to agree with her.
You could make the argument that paying down your existing debt is like building up an emergency fund (if you think of it as an equation, like Savings = The room you’re clearing on your credit limit which you leave open for an emergency) with the added benefit of lowering your interest payments.
I personally have issues with this but mathematically it makes the most sense to liquidate savings which pay low interest to pay off debts which charge high interest. Thoughts?
November 3, 2008 at 4:55 pm
Alicia, I also nickname my accounts and allocate certain funds for certain things. It’s great! Why not have several accounts? It doesn’t have to cost you anything to have that service available.
I’m also going to start a Christmas/gift account at the end of the year. I’m doing well to pay for Christmas this year without going into debt but it would be nice to not have to come out of my dayd to day spending money.
November 3, 2008 at 5:05 pm
Geoff, I also have mixed thoughts on savings vrs debt. I have found it personally comforting to have some savings started (it’s little right now but growing!). If I simply focus on the debt and no savings I think I’ll fall back into the using credit habit.
By focusing on saving for what I want while I work on paying down my debt, I’m teaching myself to enjoy delayed gratification and the joys of having some money in the bank instead of feeling bad about myself when I have $0.38 in my account before payday.
I’ve had several instances where I focused on paying off my debt and had no savings only to turn back to the credit cards and fall back into the same debt cycle. So now I’m trying to find a balance and hopefully continue to pretentd I don’t have credit cards!
November 3, 2008 at 5:26 pm
Savings versus paying off more debt:
I believe in 3-months of savings (MANDATORY EXPENSES ONLY: food, shelter, financial obligations, and stuff you CHOOSE you must have) while paying off debt and 6 months afterwards.
If you loose your job, your union goes on strike, or you get sick, all minimum payments must be made in order to maintain a decent credit score. If you must move for a new job, what is the cost of the move? If you must pay for something which is to be reimbursed, but the money does not come right away, how is your budget?
The peace of mind is great. Job-wise, it is not stable for me. Life-wise, tough year for unexpected/greater-than-expected expenses. Emergency fund came in very handy. Budgetting for regular savings towards an emergency means that it is easy to replenish the fund.
So how are you going to pay for the basics if something happens?
The ‘mandatory expenses’ are great at making you think what is really important in your budget and your life. Priorities!
What I would like to separate into two accounts: emergency versus cashflow account (expected expenses which occur only occasionally). I have to get to that…
November 3, 2008 at 5:33 pm
The pie chart of expenses from take-home pay:
15% debts
10% savings: emergency fund, long-term savings, RRSP
25% life
35% shelter
Notice that the emergency fund does not come from the debt repayment allocation!
Once debt is done, catch up on your long-term savings (wish list) and RRSP (if it suits your financial situation), you have 15% of your income to reorganize!
November 3, 2008 at 5:35 pm
Oops, sorry! I forgot 15% for transportation!
November 3, 2008 at 7:24 pm
Except for my mortgage, I’ve been debt free for 7 years. Having an emergency fund has helped me stay that way. Recently I’ve bumped the fund from 3 to 6 mos of essential living expenses using many of the techniques that Marie has listed above.
I started the fund while paying off my debt and it was empowering to pay for emergencies from the meagre fund while I was building it up than it was to fund the emergency with credit.
Car expenses/emergencies have always been kept separate, once the payments are up, I transfer 3/4 of the former monthly payment into a “car account” and repairs, maintenance and downpayment from the next car come from there.
It took me 4 years to get out of debt and I can assure you it is worth the effort. Emergency funds are crucial. Good luck!
November 3, 2008 at 8:16 pm
Over the last 3 months, I have really started realize what was going on in my finances, and thanks to TDDUP, I am 12% on the road to being debt-free! One thing I have always allowed for is savings. I think savings are really important, even if it’s only a small amount like $10/20 per paycheque.
I like to think of it in accounting terms. When my paycheque is deposited into my bank account, I pay all of my bills and allocate my money accordingly. Then I made a Net Worth Statement — I list all of my assets to get a dollar figure for penny I have…then I list all of my liabilities to get a dollar figure for every penny I owe. I subtract the total assets from the total liabilities to give myself a net worth.
The point I’m trying to make is if you’re putting some money towards savings, instead of directly on debt, you are helping your financial situation. Not only are you working towards a saving or emergency fund, in case something goes wrong (and it probably will), but you are creating assets for yourself that you can use, instead of always being at $0, and scurrying to pay down the debt as quickly as possible.
November 3, 2008 at 10:19 pm
I’m not sure if it’s ok or not, but since I have a pretty good pension plan at work, I tend to think of my RRSP as my ‘emergency fund’. If I’m without work for some reason, I’ll withdraw from it what I would’ve been earning (and pay the tax on it). It’s all in pitiful-interest, no risk investments…
Because of the pension (assuming that I have a job till then), my retirement income will be almost the same tax bracket… so I’ll be paying the tax sooner or later.
Usually, I have money on hand in annual cycles – because I save for my annual 10% mortgage pre-payment (though last year I only managed to save for 8% – boo!). So if something happens in the months leading up to the payment, I’m good for money. But if something happens right AFTER that payment, I’m tapped, and would need to draw on the RRSP.
Savings vs. Paying off credit cards:
Mathematically, it makes sense to pay off the expensive CC debt instead of putting it in an emergency savings account, especially since bank interest, pre TSFA, is taxable… reducing the amount of interest you receive even more!
BUT, and it’s a BIG but – your credit card may not always be available. The credit card company may decide (especially with the current ‘credit crunch’) to reduce your credit limit at any time – and possibly at the worst time… say, you lose your job! So paying a premium to ensure you have the emergency fund available to you may make sense. Personally, I wouldn’t feel comfortable depending on credit cards for an emergency.
November 3, 2008 at 10:37 pm
geoff and dina-
while dollar and cents wise you may be ’saving’ by paying off the debt first, but what’s next.
it’s logic versus the fact that you are a human being. guess who wins!
if it’s not paying off the debt what will be the next reason for not saving. while everyone may be well intentioned, it’s true and you’ll never save cuz by then you will need a new car, kids schooling etc and the debt cycle will never end! you will pay off one debt while incurring another. you have to get ahead of your self by saving.
consider it insurance. most fork over a good chunk every month. consider your saving account a payment into your own personal critical insurance plan. get a quote of critical insurance and work it into your budget and pay yourself!
you’ll never get ahead of your spending if you don’t save. we had to buy a family car this year. it felt good to pay for a $10,000 car in cash. the people didn’t believe us when we declined their loan offers. we could have $10,000 off our mortgage, true, but we’d have a car loan instead at a higher rate. and we wouldn’t have that nice happy feeling either.
November 3, 2008 at 10:44 pm
I don’t think you need to choose between paying off debt and building the emergency fund. Do both.
The habit of putting money away is too important to put off.
You can allocate just a small percentage of your cash to the EF while you work hard on the debt, and as the debt goes down, increase the EF savings. As jay says, relying on the credit card as the EF is not as secure as it might seem.
There is also something really heartening about having an account with a sum that keeps growing, however piddly it might be! It’s good for us, psychologically!
November 3, 2008 at 10:55 pm
I agree with Mountain Girl.
Also, because you have debt it makes it more important to have emergency fund. You need those funds to be there just in case you get laid off from work, or you need to stop working due to illness. Just because your income stop coming, you still need to make payments.
I have my saving accounts with Citizens Bank of Canada. I used to be saving with ING until after I became unhappy with its customer service. Anyway, like Gail says, find a bank that offers high interest saving accounts, and that you could be happy with. There’s no excuse not to have a saving account.
November 3, 2008 at 11:12 pm
While paying off my debt, I have managed to claw together a one-month emergency fund. Although it will probably take me about 3 years to get a six-month emergency fund, just having that small amount saved makes me feel much better than I would feel had I put everything into paying down my debt.
I hope others thinking of putting off saving for their emergency fund will consider how nice it will be on the day the debt is gone AND there is money in the bank.
January 19, 2009 at 11:23 pm
Hi
I have almost a years worth of pay in RRSP. Is it okay to think of this as my emergency savings? I just opened a TFSA to start an emergency fund, but i am also thinking that RRSP season is almost done, is it worth it to top up my RRSP’s till the end of February and then use my tax refund to start my emergency fund??
April 21, 2010 at 5:00 pm
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