Emergency Prep: Don't Forget About Money

I've talked about emergency funds in a past segment here on Frugal and Provident, but they are just important to your emergency preperations as they are to your financial security. Here are some things to consider:

• When we prepare for disaster it should be for all kinds, including natural, manmade, and even economic. Having food, water, and money will help you weather just about anything.
• Emergency prep includes unexpected health problems and unexpected loss of income. You can't rely on credit cards to keep you afloat.
• Remember to have a supply of cash money on hand. Should there be a natural disaster are a number of reasons why you might need cash, and might not have access to atms or credit card machines.
• Every little bit counts when it comes to emergency funds. Ideally you want six months to a year of living expenses in the bank, but don't let that deter you from starting to save even if it is a small amount. While it's better not to have to go into debt at all, $500 of debt is better then $1000, $1000 is better then $2000, and so on. A little bit is just how much less you will have to pay back when you get back on your feet.
• The following things are not emergency funds: houses, cars, jewelry, belongings, credit cards, and retirement funds. A house is not a good source because as we've seen sometimes they're worth less then you owe, or are impossible to sell/ tap your equity in a bad market. Cars, jewelry, and other belongings aren't because there's no way to know if you'll be able to sell them or their worth when you need them. Credit cards just equal debt. Retirement funds are not meant to be emergency funds. Worst case scenario they are an option, but they come with a lot of risks when withdrawing early. Make sure you understand all penalties that may come from touching that money before you retire.

You'll feel so much more peaceful if you know you have some money put away.

Monday Money Sense- Emergency Fund

How Much Money Do I Really Need?

Today we are going to look at how to calculate how much money you need to have in your emergency fund. But before I start that I would just like to remind people if they are still in debt pay-down mode, it would be wiser to put money toward debt than to build 8 months of savings, however you should have a small emergency fund of $1000 or one month's income to cover things like a deductible on insurance. So without further ado, the steps to calculate how much you really need. 

1. Pull Out Your Budget. After all, your budget should give you a very good indication of how much money you use every month. Write down the amount of expenses you have every month.
2. Look for Things that Go Away with Your Paycheck. For example, if you are now living off of your emergency fund because you have no income, you won't be putting money into it. You may also not be making donations. Subtract these items from your expenses.
3. But Remember Some Things May Cost More. For example, if you choose to keep insurance coverage through your employer you may be paying more to have COBRA. If you know exact amounts for these then add them to your expenses, if not I would add 10% of the amount in #2 for things that may cost more.
4. Multiply Multiply this number by the number of months of emergency fund you want. 

Other Things to Consider

1. Do You Have Food Storage? If you do you can reduce money going toward groceries, I wouldn't eliminate it completely because you may find yourself needing to pick up some fresh items, etc. depending on how much food storage you have and other self-reliance techniques you have mastered.
2. What Can You Do Without? Cable? Internet? Dining Out? There are lots of things that are probably wants... However, only eliminate these things if you truly believe you will cut them out if necessary. Be realistic about it, don't eliminate a cell phone completely if you have no other phone because how will a future employer contact you? You'll also need to look at contracts for these items because while you may be ok with giving them up, the company may smack you with a big fee to do so.
3. Are There Any Life Changes in the Near Future? If you are about to have a child, you will have more expenses. Did you buy a house? You might want to save more to cover any expenses for your house.

Hopefully this gets you thinking about how much you need. It's not an exact science, and there is no magic formula. 

For more in the Monday Money Sense Series, click here.

Monday Money Sense- Intro to Emergency Funds

For Monday Money Sense, click here.

What is an emergency fund?
  An emergency fund is an account used to save money for emergencies.

What isn't an emergency fund?
   It is not your credit cards, personal loans, home equity lines of credit, your retirement plan, or your possessions. 


What is an emergency?
  The term emergency does not necessarily mean disaster or medical emergency in this situation. This could be money to use when your car battery is dead and you need to buy a new one. This could be money to pay the deductible if your house is damaged in a storm. This could be money to live off of should you lose your job or become injured. This money could pay for unexpected medical bills.


Why do I need an emergency fund?
  So you don't end up in debt. Also, so you have a safety net should something happen to you. Here's a personal story about why I love having an emergency fund. Last month our air conditioner stopped working right. We figured it was just a minor problem. The repair people came out and found that our compressor had died. As it turned out federal regulations had changed and in order to repair our air conditioner they would need to put a brand new one in. It was going to cost a lot of money. We thankfully had enough money in our emergency fund to cover it. We didn't have to worry how we were going to pay for it, if we could pay for it, what would we have to do without, etc. It was such a relief. I can also attest to not having an emergency fund and being afraid that something would go wrong. Having been on both sides, it's much better to not have to worry about it.

How much money do I need in an emergency fund?
  Well the financial advice varies on that one. I've seen anywhere from 3 months to a year. It also varies between your take home income and your expenses. I personally would do at least 8 months of expenses, but ideally a years worth would be the best. A lot of guidelines base it off of if you lost work. It used to be that it would take about 3 months to find work again, but as we know that isn't always the case. So the correct amount for you is all about your comfort level, and how much you would be willing to give up if you lost your source of income. Use your budget as a guide to figure out an amount for you.

Where will I find money for an emergency fund?
  The same place you find money for anything else! If you were in debt and paid it off, then that's an easy place to look for money. Take those payments and put them to your emergency fund. Ideally you are already budgeting money for savings. You can find money in all sorts of places if you make it a priority.

What should I do with the money? 
   I'm not a financial planner so I can't tell you what to do, but I can give you ideas. Don't put it in your mattress or anything like that (although it is a good idea to have cash on hand...), put it someplace it can make some interest. However, don't put it someplace that isn't liquid. By that I mean don't stick it into your 401k or CD's or stocks. You need it to be in something that you can access at any moment without penalty. A good option is a savings account or a money market account. Check with your bank or a financial planner for more options.

Can I use the money in my account for other things?
   It's your money, I can't tell you what to do with it. What I can tell you though is if you use your emergency fund to pay for a vacation, and then you have an emergency you probably will wish you didn't go on a vacation. Think in terms of how long it will take to regain all the money you use, and never deplete the whole account on something other than an emergency.

What do I do once I have my emergency fund?
  Whatever you want to do with your money, some suggestions are funding your retirement to the max, saving for a down payment on a house, saving for a child's college education, investing, or saving for a major purchase. It all depends on what your personal priorities are.

Join me next week for more on emergency funds.