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?