One thing we often forget about is emergency savings. It is too easy to get caught up in spending everything we have because it feels good. I don't know about you, but seeing numbers in my account go up feels pretty good, too. Building an emergency fund is not something you can do overnight. In this post I'll show you how my fund is progressing and where I have that money stashed. Experts say to have at least six months of expenses in an emergency savings account. Currently the average American is looking for work for nine months, so maybe the experts need to revise their estimates. Nine months is a long time to be without a steady paycheck!
The first and most important thing to remember is that a real emergency and what we think are emergencies are probably not the same thing. A real emergency is a situation where, without immediate remedy, would leave you in a far more precarious situation. In my five years of working I've thankfully only had one; in December 2008 my furnace went out. We had it fixed several times before installing a new heating and cooling system in March 2009. The total cost of the new system was $4,200. This was paid for in-full with savings I had accumulated. If I had put it on a credit card with an average interest rate of 14.91% (mine is 9.75%), it would take me 22 years with a minimum payment of $84 to pay that off - that's $5,800 in interest alone! Okay, so maybe we wouldn't just pay the minimum, but the point is still the same - debt is bad! Heat is good!
I've calculated my emergency needs to be approximately $1,650 per month. This includes mortgage, cell phone (our only phones), utilities, car and life insurance, and (believe it or not) internet. If times were really tight I would forgo internet but how can you job hunt without it? I put $115 per paycheck (26 paychecks per year) into my emergency savings account. I use Ally Bank without ATM cards or checks. The only way to get that money out is to transfer it to my normal checking account at Wells Fargo. I know the interest rate right now is pitiful but having this money in cold hard cash is the most comfortable for me. Some people say this should be in a Money Market account or CD, but I have those for other purposes and other posts. Anyway, it takes me roughly six months of saving $115/paycheck to accumulate one month of emergency savings.
If we are supposed to have six months of funds I would need about $9,900. A year of funds would require $19,800. If I started from scratch it would take me over six years to get there (and my heating problem would have eaten away half of my total savings)! It's daunting to see what you need and work towards it but it can be done! Slow and steady wins this race. For me to get twelve months of emergency savings I would need to save continuously until December 2013. That doesn't seem so bad, especially considering once you reach your goal you can put that money somewhere else or buy yourself a nice reward for your religious savings!
We are fortunate that we are healthy and are able to save. I'm sure there are others out there much more aggressive than I am about this, and I applaud them for it. Because we are healthy and able to save it HAS to be a priority. It's much harder to save when one spouse is out of work or there is a baby in the house, so what better time than now? So many people I know push it off until they feel more financially secure - but the reality is that the sooner you start saving the more financially secure you will be.