Abigail from I Pick Up Pennies and Brad from Enemy of Debt had a huge discussion in the comments section of a post by Brad called When You’re Tired of Being Broke, You’ll Start Saving. Abigail followed up with a post at her site called Controversy or just quibbling? and then Emergency Funds Yea or Nay?
The discussion was great and brought up a lot of good points, and of course my own two cents turned into a quarter so I thought I’d elaborate on my thoughts regarding emergency funds at my own blog.
For a long time, there was no way we could even consider having an emergency fund, so I didn’t bother with one. We were so low on funds that we had to pay our automobile insurance month by month, which of course increases the cost since you have a monthly fee added on.
I remember when I found auto insurance that was the best price, but they had to have a six month payment, they wouldn’t take the monthly installments. That went onto a credit card. But that was the last time. Finally we had enough money that I could begin putting away 1 month’s worth of the auto insurance.
After the auto insurance, I realized there were several other bills that showed up throughout the year, so I began saving ahead for those as well. For example, we have dairy goats and we buy a squeeze load of hay. We used to drive to the farmer, and load the hay ourselves (actually Mr. A did that) but it would take up so much time and gas money, not to mention those fresh bales of alfalfa can weigh close to 100 pounds. It is much, much cheaper to buy a squeeze load which lasts about six months. It is a great feeling to know we can just go to the bank and withdraw the cash to pay the hay guy.
In a way, this could be looked at as an emergency fund; the money could be used since it builds up over time. Right now there is just over $1800 in the account. This is the money I’d like to move over to ING Direct into sub-accounts. I like knowing this money is sitting here waiting to be spent when the bill arrives.
Last year I decided to start having $50 per paycheck deducted and put directly into savings. This January I got a raise of $25 more each pay period (twice monthly) and so I adjusted my savings deduction to $75 per payday.
This is what I’m using for our emergency fund, and did use it as such a couple of times last year. It is now up close to $700 again.
I totally get what Abigail is saying about the credit card fees being much higher than any savings interest available out there. A part of me shrieks at me how much sense that makes. But it’s like a psychological thing for me, knowing that money is there to pay off the bills as they come in.
It’s the same idea as our escrow account with our mortgage. Initially we paid the money up front for taxes and insurance, and now we pay 1/12th of both of those with the monthly mortgage.
So I guess my feelings about having an emergency fund have changed over time. I used to think we didn’t need one, what is the point, we’ll just put it onto the credit cards. But with that way of thinking, we seemed to just keep going deeper and deeper into credit card debt. It seemed like when we’d put something onto the credit cards, there wouldn’t be any extra money to pay it off. At least now, thank goodness, we are paying off the debt slowly but surely.
I would like to see our emergency fund go up to $2000. This is because we have three older vehicles, speaking of which one is in the shop right now and no telling what is wrong with it. Mr. A had it taken in my AAA to get a diagnosis run on it as the problem it is having could be a number of things, and he didn’t want to spend money on parts and time to change them out without knowing exactly what the problem was.
But since our debt is still pretty high, I think maybe we’ll keep the emergency fund at $1000. Maybe.
We always have to be on the cautious side since Mr. A’s businesses sometimes have a bad month and then we are in danger of needing to utilize the credit cards. Plus we need to keep a surplus in the account for buying necessary tools. Sometimes Mr. A wants to stick with the basics, but when we sit down and talk about it, and realize the time he’ll save with the new tool, we often invest in the new tool.
So what do you think about emergency funds? Is there a minimum with which you are comfortable?
Congratulations on your realization. It’s a great story to share with people about how you come to value your emergency fund and your continued struggles with what is the right size for you. This is the overwhelming (for most people) part of personal finance, the details. There’s a new blog post at Darwin’s Finance that touches on the same topic. It sounds like to me that a couple thousand dollars is a great start for right now. As you continue paying down your debt then you might look to grow the emergency fund some more as to not go back into debt. Keep up the good work.
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:37 pm
Evolution of Wealth: Thanks. I think $2000 is good for “emergencies” but eventually I would love to build savings which would carry us through six months. Starting with one month’s worth at first, then three months, then six. That will be great.
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I am comfortable with an Emergency fund in place. I think $1000 to 1 month expenses is a good start….depending on your comfort level. Personally I am working up to 3, then 6 months.
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:38 pm
Lakita, sounds like my same plan! Good luck with your savings!
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Thanks for mentioning my piece!
I completely get the psychological aspect of an EF. Most of finance revolves around psychology — especially until you get out of debt. I think it’s great that the extra money gives you peace of mind. Just like having a lower balance gives me a better feeling of security.
I’m glad that you have some money to put aside now. It must be exciting!
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:38 pm
Hi Abigail, it is a nice feeling. But I kind of hate having to pull from it to pay the bills, even though I know it was saved for that purpose alone!!
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Sandy H Reply:
September 18th, 2010 at 6:29 am
@Mrs. Accountability, I totally agree with this! We save money for our insurance and our property taxes. BUT when it gets time to pay those bills it is kinda sad to see the money go!
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I don’t feel safe without an emergency fund. I’m really proud that you have been able to save the money like you have. I think that’s great!
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:39 pm
Mrs. Money: I have known people all my life who kept a credit card for “emergencies” instead of having an emergency fund. You are wise beyond your years to have that perspective!
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Now that I have few hundred in my emergency fund I can’t believe how much better I feel! I will continue to contribute as much as I can every month until I build up at least a one-month buffer. Only then will I put the “leftover” money towards debt. I’ve been down that credit- card-as-crutch road too many times. It’s a like driving a European turn-about, very tough to get off:)
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:41 pm
Hi SAHMCFO: I will be so happy when we are in a position to build our first one month’s worth of expenses! Good luck with yours!
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Interesting. At first I was thinking–but you MUST have an emergency fund. . .but yes, if you have a lot of debt, it seems odd to have your money waiting around in low interest savings account when you could pay down your debt. . . ok, I see the arguments now.
I’d still say that the emergency fund is REALLY important. It’s one thing to have a mortgage, it’s another thing entirely to use the credit cards for emergencies. I think keeping a little extra money on hand and having an emergency fund is the way to go. I’m thinking even if we buy a house eventually and take out a mortgage (which will be our only debt), that I’d still want to keep a year’s living expenses aside. . .ok, now you all know how anal I am.
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Brad Chaffee Reply:
March 22nd, 2010 at 4:25 pm
@Simple in France, The money that is in an emergency fund while paying off debt is much lower than one would want to have for a fully funded emergency fund.
The small emergency fund isn’t in place to earn high interest it is there in case of an emergency, and so you don’t have to go into debt to fund that emergency. Once the debts are gone then the big emergency fund comes into play.
I also think there is no consideration being given to the fact that having a credit card is risky because of the temptation to use it on impulse. It has been proven that people spend more on plastic. Also if you have to put your emergencies on credit then you are paying interest on those emergencies if they are too big to be paid back in one month.
One things for sure, there are lots of ways to do personal finance and I am glad I found the one that finally worked for us. 🙂
P.S. Simple in France – I still don’t get it. Having an emergency fund turned our life around completely. 😀
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:42 pm
Simple in France, you got it! That was a really simple explanation. Too bad we can’t all win the lottery and wipe out the debt in one fell swoop! I’m going to hate seeing our small emergency fund go to fixing the one vehicle that is getting diagnosed. 🙁
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I must be missing something.
To compare credit card fees with interest earned on a savings account to justify using a credit card for an emergency fund makes no sense to me.
Are we talking about cash back here? A fee is something we are charged and interest is something we earn. I feel like I am missing something.
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Mrs. Accountability Reply:
March 22nd, 2010 at 7:30 pm
Hi Brad: I think you are missing something. First, I was not saying that myself or anyone else would PREFER to use a credit card than build an emergency fund. Living at or below poverty level can have an effect on the way one handles the income. As I mentioned in my post, at one point in time we had no way at all to build an emergency fund, but we also had very little credit card debt. We had just enough money to scrape by with one income, but that was perfectly okay with us. Sometimes I wish I could go back to those simpler times. Back then, we had to resort to using the credit card as an emergency fund, although I loathed the concept (having recently gotten out of credit card debt!). We chose to move out of the city to get our boys into a better area, and it cost much less for housing also. We chose to have one parent at home with our children. As things have eased up financially, we can now begin to think about building an emergency fund.
The comparison of credit card fees vs. savings and interest… I can still understand the point. If you only have $100 a month to put onto something, I can understand taking the risk in not having an emergency fund, but trying instead to just throw it all at the credit card. If the credit card fees are charging 16%, I’m going in debt even more by delaying the process of paying off the debt by diverting my funds into savings, which are earning under 2%. I think living at poverty level also plays into this scenario because typically if you are living at or below poverty level, you can’t even afford to buy store brand coffee let alone buy Starbucks. It always kills me to read those magazine articles about how people save hundreds of dollars a month simply by avoiding Starbucks. I used to say I wished that I smoked, so I could quit and have more money. Anyway, this is my attempt to help explain the thinking process that comes into play for me on this topic.
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Ok gotcha! I can understand that. I am still sure that I myself would rather have the $500 in savings (which is what Dave Ramsey recommends for people below poverty), than use debt to fund my emergencies.
When you use the very piece of plastic to fund the emergency that you’re trying to pay off, you have not gotten anywhere…except for back into debt. If you have an EF, you fund the emergency using no debt, then replenish the EF and start paying off your debt again. You were slowed up just a little but you accumulated no debt and when you get back on the debt repayment train you don’t have to deal with the fact that you are starting where you were say 2 months ago. Sometimes paying off debt is not about the math as much as it is about the motivation to continue. If you feel you aren’t making that much progress it is easier to feel defeated and therefore you will not put as much into your debt repayment plan. Eventually that leads to ground zero because people generally give up.
I still think the “temptation factor” is too risky especially for someone living at or below the poverty level. The idea is that having to find another way to fund your emergency rather than just pull out the plastic, is sometimes more productive whereas using debt to fund an emergency is counter-productive. I know there are many people out there that can’t work but still have the ability to find work in some way that fits into their disability. That’s what makes computers so awesome. I don’t think a disability by itself disqualifies someone as being incapable.
The point of my post was for people who can do more, but choose not to, and instead come up with excuses as to why they can’t save $1,000, or even $500. It was about choosing the correct priorities, instead of complaining about what you can’t do while watching a big screen plasma television. haha! There are a lot of people like that out there.
I have helped more than a few people start a budget who claimed at first that they didn’t have enough money each month. The budget is where behavior meets reality, and more often than not I was able to find more than a few hundred dollars that was being wasted on stuff.
I’m not knocking Abigail’s mathematical method to paying off debt but for most people it is more beneficial to concentrate on staying motivated and avoiding temptation. The psychological effects of debt elimination need to be considered as well.
Great conversation! 😀
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It’s pretty easy to advise folks to do this or do that (I do it all the time!), but without knowing their circumstances, it’s not so easy to know if a blanket recommendation works widely.
Personally, except when I was married to a man who insisted on handling all our finances himself with no interference from the Little Woman, I have always deposited at least a couple hundred bucks a month to an emergency/indulgence fund. But, except when I was married to the man who brooked no interference from the Little Woman, I was never in debt (he got us a million bucks in debt, paid down to 3/4 of a million by the time the bank called the business loan for which he had signed a personal guarantee…).
Because I’ve never had to worry about paying off credit card debt, which IMHO is so rapacious it should be criminalized, I’ve been able to save regularly, even if on a small scale. I aimed to have one year’s worth of cash in liquid savings, and that’s what I have.
If I had to deal with credit cards? I probably would strain every gut to pay them off. I might even put every red cent toward them, though I doubt it — that would make me nervous. Probably I’d keep setting anything from $20 to $100/month in savings, if I could afford it; but my first goal would be to get free of the usurious debt.
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I have always had money in savings, but have never called it an emergency fund. It was just the way I was raised. I had one credit card that I put everything on and paid off every month because I lived very frugally- and I wanted to write ONE check out of my savings/checking account a month- and having a credit card was the only way to do that. I know that was pretty silly.
My husband is a here and now man and over 7 years of marriage bliss we have found ourselves in a hole of debt. We are slowly working on paying it off but our situation isn’t like everyone elses. We have a high yield savings account that we are using to save to build a house. We have a timeline for that and everything else goes toward paying down credit cards, student loans, and a tractor lawnmower loan. The House Savings account is our emergency fund too I guess. If we need it we have the money readily available to take out. It makes me feel safer- but at the same time I cringe at thinking of the higher interest rates we are paying on other things (though our highest interest rate is only 7.5%- I feel terrible for the people who have 16+% interest rates. I would never agree to a card that high!
Thanks for the post. Every situation is different, whether you’re living in poverty (I grew up that way) or if you are making $100k+ a year and have spent unwisely in the past! This emergency fund is viewed differently and blanket recommendations just don’t always work.
Thanks for the post!!
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