When Disaster Strikes...

I woke up this morning to have a shower as usual. I noticed that the water was barely warm. I found it odd but went on as usual getting ready for work. As I was shaving it hit me. I knew what the problem was but finished getting ready.

I went downstairs. Broken water heater. Leaking. I was none too pleased.

Immediate call to my Dad and work begins. End up shutting the water off to the entire house since the valve for the water heater is of course not closing all the way. Drained out the water heater and started to soak up the water as best I can.

Did I mention I have a flight to Maine for work at 5:40PM? Yeah.

I get to the office around 10AM. I am late, stressed, and already had a shortened day and week due to travel and I am going to Easter Island on Friday!

Ughhh...

At least this happened now and not while I was gone for 10 days. It could always be worse.

Luckily my Dad will get time off to come for a long weekend and we will install a new water heater and get things sorted out. It will be a lot cheaper than a plumber/electrician and I will buy him a nice dinner and his gas here and back.

Now I am off to Maine!

How much savings will make you sleep better?

That is the question I am trying to answer. I am still saving for my emergency fund and have been back and forth in my mind on a target number. I have now decided:

I need 1 year's worth of bare bones bills saved up to not worry about job loss or some other life event.

That changes my new target to roughly $20,000.00. That seems like a lot but to live an entire year, 365 days without income, is a nice safety net. That is also the amount I would need in order to attempt starting my own business or going to consulting/contracting full time. This target represents that goal.

My main goal in life is to be financially independent enough to not have to work 40 hours per week. That leads to other goals like travel and part time contracting to fill the gaps. The more I have in savings the less I actually need to work in order to live. I don't want to quit working completely at this point just not have it be the focus of my entire life.

Having time to do what I really want is the most important. I don't need a Mercedes, 18-bedroom house, or 67 plasma TV's. Just time to do what I like (mostly travel at this point). Without having to work 40-60 hours per week I can enjoy myself more. That is the real aim here.

I know that if I had a savings account that could cover my bills for the next 365 days I won't be as worried about losing my job due to some unforeseen event. I can focus on other things and move forward. My patience is thin but I am getting there. Hopefully another year or so and I will be in a much better position.

Emergency fund philosophy - what is an emergency?

I have a good sized emergency fund. In order to come up with my target number I had to ask myself: What is an emergency? How much do I need?

I consider the following a financial emergency:

- job loss
- medical care
- car repairs
- house repairs
- emergency last minute travel

From that list I come up with an amount of money to cover each category. I total them to come up with the target number. In my case the total was $10,000.

I use ING Direct savings accounts to put my money for each type of emergency. My monthly contributions are divided among them until each goal is reached. At this point they are all funded except my target for job loss (the largest one!).

I'm almost there! I'm considering doubling the target once I fully fund retirement and still have more to save. With 20,000 I could cover nearly 1 year with 0 income. I really like the sound of that!

Using the above breakdown will help you find a target number that makes you feel secure. Create your target and get started with that first dollar today! It's hard to explain the stability you feel when you have a good buffer.

Why Emergency Funds Work: My Car Repair

I have been having some minor car trouble with it running a little hot. It wasn't as much of an issue over the winter with colder weather. Spring is now here and I am noticing the problem more and more. Now is the time to take care of it before more major issues come.

Today I did some shopping around. I need a new readiator (it leaks coolant). I found one online from an auto parts chain that had the part in stock locally and I got and extra 15% off with the online coupon. Now I just have to pick it up and take it over to my mechanic friend to have it installed.

I am not in any financial panic as I have money in my emergency fund earmarked for car repairs. The parts and accessories I need for the job were about $140 total. This comes out of my emergency fund and my normal monthly deposits to the emergency fund will replenish it over time. Luckily for me my friend accepts beer as payment for labor.

Without that money set aside I would be in a bit of a bind. Maybe I would have eaten a lot cheaper and stayed in more to make up for the cost. It could also have gone on a credit card where I would pay interested until it was paid off. Fortunately this is not the case as I planned ahead.

Thanks to the emergency fund a potential financial panic was curbed. Stories like this happen all the time. Be ready!

Emergency Fund: More than just a target number!

I have decided that a target dollar amount for my emergency fund wasn't enough. For most people it is ok but I like to be a little more detailed about it for my own life. I have come up with a list of sub-funds that the big number covers. I am assuring myself that multiple categories, in order of importance, are covered in the even of a financial emergency.

This idea spawned from the fact that I have multiple savings accounts. I originally got the accounts because of interest rate offers and other various reasons. I now have am using this to my advantage to repurpose them for specific parts of my emergency fund. The numbers happen to fall into place where I feel they needed to be.

Here is a break down of my target $10,000 emergency fund (in order of importance):

• $5,000: Job loss/pay the bills general fund
• $500: Medical co-pay and misc fund
• $500: Car repairs
• $1000: House Repairs
• $3,000: additional job loss fund for more extended unemployment and misc. emergencies

I have the first 3 covered as of today. This brings me now to the extra $3,000 to add to my general fund. I am comfortable with a $5,000 general fund but would feel much better with $8,000. I am now adding $100 per month to the general fund and any extra income/savings will go to that as well. I calculate that I could live for 4-5 months off that $8,000 if I had too. The peace of mind I get is priceless!

Another "tiny" emergency fund that is built into my monthly budget. I have a $100 misc category that I will use up first before tapping into any fund. This keeps me from having to do $5-20 transfers for little stuff that would throw my budget off. It just makes my life easier to manage financially! I do track it and roll it over or transfer to savings if there is some left.

Emergency Fund: Slight Change in Philosophy

Today I have decided that I am going to make a significant change in my emergency fund plans. Since I am currently in debt I am going to reduce my emergency fund to $1000 and use the remainder to pay down my credit cards.

After doing some reading on the subject and analyzing varied opinions and numbers I have concluded that this is the best option. Here is why:

• I earn a max of 2.15% at SmartyPig. My fixed rates on my balances are 6.99% and up. I am mathematically much better off here.
• Cashflow issues: Having multiple minimum payments to make squeezes my budget a good bit. By paying down with savings now I can accelerate my debt snowball. This will eventually turn into putting the money back into the emergency fund.
• Peace of mind. I do stress daily about my debts. Paying it down faster ends my stress faster and I can move on with my life!

Above is the upside to this decision. I also had to weigh the down sides to make sure I am doing the right thing. In my opinion, I am making the best choice for me. Here are the downsides:

• Job Loss: If I get laid off I have a lot less cash to fall back on. One counter-argument is that I could simply use the cards again. While this is not ideal I will take this risk.
• Interest rates go up. While unlikely I do have opportunity cost of not being able to invest the savings in a higher rate investment.
  
• Further away from self employment. This delays my plan to work for myself but the financial gains over the long term are worth it to me.

Overall I think I am making the best decision I can in this situation. The peace of mind from paying this down sooner is a big deal to me. It will outweigh the stress of losing my job if that were to occur. My suggestion to anyone facing this same problem is to look at all angles and go with what helps you sleep better at night. Having a bigger emergency fund now with debt is ok if it reduces stress!

10 Items that an emergency fund needs to cover

Lately I have been putting a lot of focus on my emergency fund. I am working hard to get it up to the level I want: 1 year of expenses covered. I have done some thinking and realized that yearly expenses are more than just bills and groceries. There are a lot of bases to cover!

Here is what an adequate emergency fund should cover:

1. 6 to 12 months of monthly bills (utilities, food, rent, gas, etc)
   
2. ALL insurance deductibles (home, health, auto, etc)
   
3. 5x doctor visit co-pays
4. 2x prescription co-pays
   
5. $500-$1000 car repair fund
6. $500-$1000 emergency home repair fund (plumber, electrician, locksmith, etc)
   
7. $1000 travel emergency fund (death or sickness in family, etc)
8. 6x minimum debt payments (for all non-mortgage debts)
9. $500 pet emergency fund (if you have pets this is for non-budgeted vet visits)
   
10. $500 catch-all slush fund for random items (parking tickets, smaller unexpected needs, etc)

Some will argue this is excessive. Obviously some of these items will not apply depending on your own financial scenario. Pick the parts you need. I may be over-thinking it here but I want to be sure that just about any disaster that life can throw at me will be covered. Having too much savings is a great peace of mind to me. It is always better to oversave than the opposite.

Does your emergency fund cover everything you need?

Account opened with SmartyPig!

I have finally opened an account with SmartyPig. I am going to use it for my savings goals and for the great 2.01% interest on the savings. I am going to start small but increase as I pay down debts and raise my income. This is part of my 101 goals in 1001 days list to increase my savings and make it automatic.

It only takes $25 initial deposit and $10/month minimum deposit to begin. I will start by slowly adding to the account to bring my emergency fund up to 12 months of expenses. Once I have that in place I will be able to breathe a lot easier and not fret over money as much. I am "buying" some peace of mind with a large cushion of savings!

I plan to use them for other goals too as long as they stay competitive with the interest rates. I really like the layout of their site and the calculators they provide for you. Check it out for yourself!

What should you include in an emergency fund?

A lot of people go with the general rule that you should have an emergency fund of at least 3 months and preferably 6 months of living costs. I take mine a step further and break it down so that other specific emergencies are covered with extra cash. Here is my list of what I have reserves for in my emergency fund:

1. 6 Months (12 if self employed) of living expenses. I can pay my bare bones, needed to live bills for 6 months without earning a single dollar.
2. 50% of ALL insurance deductibles. I chose 50% as it is unlikely you will need all deductibles at the same time. This includes homeowners, car, health, dental, and any other insurance that has a deductible. Surprises will be covered here!
3. $500 car repair fund. Up this to $1,000 if your car is 7+ years old. This will cover any unexpected repair that may be needed. Accidents are covered by insurance and deductible fund above.
4. $500 slush fund. This is a pad for little stuff that I may not have though of that can be just big enough of an expense to throw off the budget.

Having all of the above in your emergency fund will make sure you are covered for just about any unexpected event that comes up in life. It is not a question if something will happen but when. Be prepared and avoid financial mayhem!

Basics: How to start an emergency fund

A few of my close friends are reading my blog and have asked me: "How do I start my emergency fund?"

My first answer was: "Simple. Just open an online savings account and transfer money each paycheck."

I realized that most of these people are not used to saving money at all. I neglected the fact that someone trying to get on track financially for the first time might not know how to start logistically. Guys: This post is for you!

If I were starting an emergency fund today from scratch this is what I would do:

1. Open an online savings account at ING Direct (or other online bank of your choice). Ask me for a referral so we both get the account opening bonus money!
   
2. Roll/Deposit all your coins at your local bank and transfer it to the above savings account.
3. Set up an automatic transfer of $20 (or more if you can afford it) per paycheck to the new savings account. Analyze your monthly budget to get your exact figure.
   
4. Calculate how much your total monthly essential expenses are each month. This only includes the money you need to live like rent/mortgage, food, utilities, insurance, etc.
   
5. Multiply above number by 6. This is your target amount for your emergency fund.
6. Deposit any extra income, tax refunds, etc. into your emergency account.
7. Once you hit your money target you are done. Continue saving for other goals or stop the automatic savings transfer and add the same amount to debt repayment.
8. Review your emergency fund each year. Did your expenses change? Do you need to add more to it to maintain your 6 month's worth of expenses?
   

If you follow all of the above steps you will have set up and maintained your emergency fund. Having an adequate emergency fund is the only way we can weather all the bumps that life throws at us. Unemployment, health problems, house fire, and many other situations can come up and this is our own form of insurance.

If you ever have to tap into your emergency fund remember to go back to step 2 and replenish the money as soon as you can. An emergency fund works only when we keep it funded at all times.

Side note: If you are self employed you need a 12 month emergency fund.

Avoid a financial trainwreck: Have an emergency fund!

I have done quite a bit of reading and everyone seems to have differing opinions on how much of a cash emergency fund one should have at hand at all times. I read many different angles on it and have formed my own educated decision. The money should be in a separate, interest bearing account like a money market, savings, or CD. I prefer CD as I earn more interest if I don't use it and pay a small penalty if I do. It also makes it a little harder to get at the money and you will think twice before spending it!

For those of us who have "normal" salary or hourly jobs we should have about 4 (minimum) to 6 (maximum) months of living expenses. You arrive at this number by looking at your monthly budget and multiply the total by 4 (or 6) and that is the target. Self employed people should have at least 1 year saved. This may sound excessive but in a recession like our current economy it can be very handy when work is harder to come by.

Your emergency fund is exactly that and should not be used for any other purpose. I define it as the money I will use to live in the event I lose my job and am forced to look for another. This protects your sanity and your credit and you do not have to rely on unemployment (assuming you even qualify). Only other purpose I can think of is to use the money for expensive medical bills or repairs on a car or home. Basically you save it to make sure your life is not interrupted due to some event beyond your control.

If you do use the funds for any of the above purposes it must be replenished as soon as possible. I would even argue that debt payments should go down to the minimum until you have it built back up. Paying off debt early is always good but if you have little or no emergency money you will be unable to pay the minimums if something were to happen. This leads to higher interest, collections calls, and bad credit marks. It is worth paying a little interest today to avoid this in the future.

Do you have an adequate emergency fund? Is it invested safely?