How can I afford to build an "emergency fund" ?
November 19, 2008 11:41 PM   Subscribe

How does one "put aside" x months of expenses for emergencies? Not pay expenses for x months?

I often hear this advice (which I think is great) but putting it into reality is driving me mad.
For example: I make $18,000 year net and want to put aside $ 9,000 or 6 months living expenses (living practically check to check). If I put 1/2 of my check aside (impossible with expenses) it would take a year. At a more reasonable rate of 1/8 of my check ... 4 years?

Seems like by the time you have it put aside an emergency quite likely will have already happened (like a job loss). Any thoughts?(besides not sleep and work until health is lost) :)
posted by swiffa to Work & Money (14 answers total) 26 users marked this as a favorite
Any money in an emergency fund is better than no money at all. So don't let a big number of $9000 scare you from the idea of saving any money for emergencies at all. It's possible that you might lose your job in 4 years, but you might also have any of a number of other smaller emergencies for which whatever sum of money you have squirreled away will come in useful. Even if you did lose your job within 4 years, having $3000 in an emergency account would still be better than nothing.
I agree that with $18000 net year's salary putting away $9000 is impossible. So just try saving $100-300 each month. The money will slowly add up and while it might take you a while to reach six months salary, you'll still sleep better knowing that you're insulated from small emergencies such as your salary not being paid on time or cheques bouncing.
posted by peacheater at 11:53 PM on November 19, 2008

For the longest time I was financially overextended (largely due to unnecessary lifestyle spending), but at some point not too long ago I decided to set up an automated monthly transfer from my checking to my savings account. It was very small - the cost of a few meals out, maybe. Before I knew it, I had a one-month buffer. I was able to increase the amount of the automated transfer a bit later, and now my buffer is even healthier. So, I recommend something automatic and regular (every pay period or every month) as a great way to save without thinking about it. If $1K of that $18K is just not in your checking account when you budget, you'll figure out a way to make it work.
posted by thedaniel at 11:58 PM on November 19, 2008

The usual method of encouraging savings is "pay yourself first" by immediately transferring money from your paycheck into a savings account, before you have an opportunity to spend it. If possible, disable ATM access and the like.

If you poke around on the money blogs there is a lot of debate about the best strategy for doing this if you have debts to pay down. Some people like to fill the fund first, others gradually along with other payments, and still others think debt paydown takes priority so that when emergencies happen you have the cash flow to deal with them.

I would personally set some interim goals, such as building up one month's salary in the first 3-6 months, two months in the next interval, and so on. Of course, you must also actually save the money for real emergencies, and immediately start refilling it if you have to use it for anything.

Note, by the way, that life insurance is a pretty easy way to do this. Not only do you have an emergency fund that you can loan to yourself (the cash value of the policy), you also have a death benefit in the event of the ultimate disaster. And it's standard to have the ability to invoice "yourself" to pay your loan back. The only drawback to this is that the cash value does not build up as fast as a cash emergency fund.
posted by dhartung at 12:03 AM on November 20, 2008

MeFi's own J.D. Roth has a great blog called Get Rich Slowly. Today's guest post by Dylan Ross is on exactly this topic, with a huge amount of discussion.

Start with a smaller goal, like $1000. That should help with a variety of smaller emergencies, but not, say, extended joblessness. If you can put even $100 a month aside, you'll reach that goal in less than a year. Use a bank, like ING, that at least pays you some interest to make things go a little faster.

Take a close look at your budget, too. Cutting some luxuries makes sense, but also re-assess what you consider needs. There may be alternative ways of dealing with those that can still save you money. Cutting just luxuries may make you feel deprived (at least, that was the advice I got just recently.) Also: J.D. on needs and wants.
posted by maudlin at 12:08 AM on November 20, 2008 [2 favorites]

Yep, start with a smaller, more realistic goal, broken down to achieve systematically. If you can put aside 10% a month (less than $40/week, based on your net of $1500/mo.), you'll build an emergency fund of $1000 in less than 7 months.

Check out All Your Worth for an approach to how to get your money in balance (essentials/savings/fun money) without having to track every individual dollar you spend.
posted by scody at 12:26 AM on November 20, 2008 [1 favorite]

Set aside a couple of hours. First convince yourself you've just lost your job, and you have no promising job prospects given the economy. Then, look at your bills.
- Keep in mind you will be traveling less since you're not going back and forth to work. You're grocery cost may be lower depending on whether you brown-bag it for lunch or buy something to eat.
- If you have both a cellphone and landline, ditch the landline, if you have DSL look whether there's a local provider for naked DSL. Cable TV, then probably cable internet, the TV channels can go.
- Consider your electricity usage, everything from lights and heat and a/c, to whether using a garage sale toaster oven would be more efficient than the full-size oven.
- Look around your home for things you can sell, locally on Kijiji or Craigslist, or through eBay.
- Strip everything down to the bare minimum, after all you may need to move to find a job anyway.
- Then, look at what your expenses would be in reality once utilities are trimmed away and you have some cash from stuff sold. That's your number for how much should ideally be set aside.
- However, consider also that there are other jobs out there. Six months is a long time, but if you can supplement with some temp contracts or lesser paying part-time jobs then you need to have even less put away.
- That said, ideally get a better paying job, but still implement the above trimming, using the extra cash for savings.
posted by hungrysquirrels at 4:31 AM on November 20, 2008 [1 favorite]

An emergency fund of 6 months is quite a lot -- more than the vast majority of people have, I'd guess. I think the important mental leap to make is to realize that some emergency fund, even if it's not the whole 6 months, is better than no emergency fund.

For people who live paycheque to the paycheque, one very small thing -- a fender-bender or a medical emergency with some co-pay issues or a funeral they need to travel to -- can send them into a spiral of debt very quickly. They take out a credit card to pay or get a payday loan to cover it, and all of a sudden they add payments and interest to a monthly budget that was already barely scraping by, and then they can never get out from underneath it all.

Planning your budget to accommodate $50-100 a month in savings towards your emergency fund does two things:

1. It builds your emergency fund, so if you do have one of those small emergencies, you can get past it without cycling into the debt spiral.
2. It creates room and flexibility in your budget so that you're not so immediately tapped out every month. Not that you should ever spend that money, but the floor of what constitutes a crisis gets a lot higher when you have spare money every month to save, rather than just eking by on what you're making.

Job loss is certainly one of the hardest emergencies to deal with it, but don't make the mistake of thinking it's the only one. If you're living for the next payday every month, then much smaller things could still be a significant problem, and having an emergency fund will help with that.
posted by jacquilynne at 5:43 AM on November 20, 2008

I started with $50/month. Eventually I increased that amount (fairly significantly) with the help of You Need a Budget. I found the best way to do it was to "Pay Myself First" as they say. I set up an ING account and then changed my direct deposit so that the money automatically went into that account without my touching it. That was key for me. I also put at least half of any "bonus" money in there (birthday/holiday checks, tax rebates, etc). I agree that six months is a lot. It might be ideal, particularly these days, but it's a pretty overwhelming goal for you to start with. Don't make your goals so lofty that you can't attain them. First try to get one month, then three, then go for six. Good luck!
posted by ml98tu at 7:12 AM on November 20, 2008 [1 favorite]

Just wanted to add that someone with your income may be able to get into an IDA (Individual Development Account) program - a program where your savings are matched with non-profit or government funds. (Kind of like an employer match in a 401k.) This isn't exactly on point because generally you have to be saving towards some productive asset, like a mortgage downpayment, but it might still be of interest. Here's an FAQ (pdf) and a list of programs that's searchable by location.
posted by yarrow at 7:14 AM on November 20, 2008

Nthing all of the above. You have to start small, but you have to START and then you have to be CONSISTENT. The easiest way to do that is to set up an automatic deposit, even if it's just $10 per paycheck. It will add up. Another way is to have all found money go into the emergency fund--sell stuff, donate blood, get a second job--and all of that extra income automatically goes into the emergency fund.

Rather than aiming to put away $9,000, figure out a number that you're comfortable with. Many personal finance gurus recommend starting with $1,000 (or even $500 if you make less than $20,000 per year, which applies to you), then paying off debt (you don't say whether you have any), then saving up four to six months of expenses (which is not the same as income--just the bare bones what it would take to have a place to live, transportation, food. No eating out, no trips, no new clothes!). My goal was three full months of expenses, and it took me about two years to save it up when I was first out of college.

Luckily, I didn't have any emergencies during that time. I always gambled on the fact that at my age, it was unlikely that I'd be unable to work AT ALL, and I was totally willing to work at Starbucks or McDonald's to help bring in some income to supplement my meager emergency fund. And if it WAS so bad that I couldn't work at all, well, I'd probably move back to my parents' house, so I really just needed enough money to cover the cross-country move.

It will take you a while but it provides a LOT of peace of mind. I could lose my job now and I would be ok. If I need to fly across the country for a family emergency, I don't care how much the ticket costs. If I need emergency dental work or a prescription or if my apartment burns down--I will be ok, because the one thing I won't need to worry about is do I have enough money to put a roof over my head and food on the table. Sure, my emergency fund won't last me forever, but it will last me longer than most of the people around me who have no cushion.

I recommend the blogs Get Rich Slowly and The Simple Dollar to give you more information, as well as Dave Ramsey's books (warning, there's a lot of evangelical Christian speak in there if you're averse to that) and Your Money or Your Life. Welcome to financial peace!
posted by peanut_mcgillicuty at 7:27 AM on November 20, 2008

Once you get into the saving mindset, you need to bear in mind that your opinion on spending changes (or, at least, it can). Even if $9000 seems a lot now, once you get into the right mindset, you'll start adding any gift money you receive to the pot, you'll think twice before buying certain items, and likewise - all of this will help the pot grow quicker.

A few years ago I had no savings at all. Now I have quite significant savings. I don't think being frugal helped me become a saver, but being a saver helped me become frugal :)
posted by wackybrit at 7:41 AM on November 20, 2008 [1 favorite]

You can help yourself be ready for a financial emergency in several ways.

First, in addition to increasing the income you would have during that time, reduce expenditures. Right now, look through your monthly expenditures and see what you can cancel. Are there debts you can consolidate under a credit card consolidation loan with a credit union, under a smaller interest rate? Are there services you pay for but don't use (cable premium channel packages, too-large cell phone plans that give you more minutes than you ever use, etc.)? Are there expensive habits you can replace with cheaper ones (takeout pizzas versus frozen pizzas, etc.)? More radically, most people's biggest expense is rent. Is your apartment overly spacious? If you are in a 1-bedroom, would you be equally as happy in a studio, etc.?

Second, create an action plan now. Imagine your employer calls you in and fires you this afternoon. What would be the next steps you would want to do? You may be too upset or flustered to think straight then, maybe even for several days; so now, while it's theoretical, think logically and pragmatically: what would you do? Update your resume now, and put on your calendar every 2-3 weeks to look at it and adjust the duties to more accurately reflect your job. Print out a batch of resumes — for safety's sake, at a Kinko's or at home, not at work, as you don't want to make people think you're looking elsewhere. Make sure you have a thoroughly researched, detailed employment history handy FOR YOURSELF with tons of details (supervisor, duties, pay rate, etc.) for those annoyingly repetitive employment forms. Look around where you work and decide now who you'd call up and ask for a reference if your H.R. folks let you go, and note their contact information. Know how your state's unemployment system works — some of them don't require going to an office anymore, and have you do all of it on the Web and via direct deposit, which is incredibly convenient. Look through each of your monthly expenses (including any that might be currently covered by your workplace, i.e., transit benefits) and decide whether you would could temporarily defer it if you were unemployed or would still need to pay it. For example, Netflix or World of Warcraft are expenses you could put on hold, whereas rent most likely isn't. Find out at what URLs and via what procedures you would put these expenses on hold.

Third, do what others have suggested above: save $1,000, then pay off your debts, then work on saving up an emergency plan.

What if a financial emergency hits prior to the completion of paying off your debts, even before you have saved up any money specifically tagged for emergency savings? In such a situation, you will have the $1,000 (put it in an ING savings account — high interest and takes a few days to get money out of, thus discouraging dipping into it for a pizza), you will have the credit line you have been clearing off your cards, and many states provide six months' unemployment insurance to you per calendar year. Were it to happen to you in the near future, the President-elect is advocating an extension of 13 weeks more of unemployment benefits, as well as a suspension of taxes on said benefits. [The $1,000 is useful because there are expenses which do not take credit, and cash advances have near-usurious interest rates; it can also, even while you're employed, be a financial lubricant to help you slip pass small emergencies without costly financial penalties. (But if you take money from the $1,000, it is your first financial priority to put that back. Otherwise it's too easy to get rid of your $1,000 quickly via attrition.)]

There are additional steps you could take for non-layoff emergencies; investigate what short- and long-term disability benefits you have, and if there are supplemental policies available to you that would help bring your disability income up to 100% of your normal pay. Know where the ceiling is for your medical insurance.

(If any of the above is useful to you, the only thing I'd ask in return is for good thoughts directed my way during my own employment search, as a result of layoffs the last Friday in October at my former employer ... )
posted by WCityMike at 9:48 AM on November 20, 2008

Suze Orman's book "Young, Broke, and Fabulous" has a good approach to this--she basically says that if you could put that much money in savings, you're not broke.

Save slowly but surely, do your best to ensure that you have a low interest line of credit that you can use if you ABSOLUTELY MUST, and cut out some expenses if you can.

And do like I did, go to the bookstore and read the book without buying it. Even more savings!
posted by sondrialiac at 10:46 AM on November 20, 2008

In addition to a modest paycheck saving set aside, any "found money" that comes in -- gifts, bonuses, freelance jobs, pension rollovers, whatever-- goes into the emergency fund. I've put two kids through school, rehabbed my house, bought every car we've ever owned with cash, and set aside a nice little retirement nest egg (now decimated but oh well), using this method. I have 4 months living expenses liquid always. We live pretty frugally, but I don't feel any lack. (This is over the course of about 30 years.) Because we have zero consumer debt we don't need to make the choice of whether to pay down debt or save.
posted by nax at 5:40 PM on November 20, 2008 [1 favorite]

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