basic tenet of personal finance that gets short shrift
but can dramatically improve your money life is having a
cash emergency fund.
especially important for some to consider this time of
year, as new high school and college graduates make
their way in the world and soon-to-be newlyweds join
of millions of families struggle to afford a car repair
or dental treatment because they lack sufficient
emergency savings," Stephen Brobeck, executive
director of the Consumer Federation of America, said
when releasing results from one of many surveys that
show how poorly Americans save. The CFA study found that
just 37 percent of low- and moderate-income families
have a savings account. Of those who did, the median
amount in it was less than $1,000.
parents, who are financially responsible for children,
don’t save well. Just 42 percent of parents maintain
an emergency fund, according to a survey by financial
firm T. Rowe Price.
sounds so simple: Put away some money for a rainy day.
Yet so many people don’t do it — perhaps because
they don’t have a good answer to a fundamental
should I leave cash sitting idle when there are so many
things I need and want?" Or, "I could invest
the money and earn far more than measly bank
only need one persuasive reason to start your own
emergency fund, or add to an existing one. Maybe you’ll
find one here.
finance charges. Bad things — expensive bad things —
happen, even to good people. Cars break down, roofs leak
and teeth need crowns. If you have the cash to pay for
life’s curveballs, you’ll avoid putting charges on a
credit card and paying finance charges, or, worse,
taking a payday loan. If you can’t pay the bill at
all, it will likely go to collections and damage your
credit rating, making borrowing more expensive for years
insurance costs. If you have cash, you can choose higher
insurance deductibles — the amount you pay before
insurance kicks in — for auto and home policies,
significantly and permanently lowering your annual
insurance costs. Common advice is to increase your auto
insurance deductible to $1,000 and raise your home
deductible to $2,500.
no to extended warranties. Similar to insurance, having
cash for repairs and replacements of appliances and
gadgets allows you to forgo pricey extended warranties.
loss. A robust emergency fund can help compensate for
losing a job, bridging the financial gap until you can
get income flowing again.
of control. Having a pile of cash can provide peace of
mind and a feeling of control. Some of the worst money
worries never materialize, but are conjured in our
minds. Having even a few thousand dollars stashed away
can relieve anxiety.
income. For those with up-and-down income — those paid
on commission, for example — a cash cushion is
necessary to even out high- and low-income months.
yourself options. If you have no money, perhaps you will
decide against buying an airline ticket to visit a sick
relative. Will you forgo an operation that could save
your pet’s life? With a little extra cash, you won’t
have to make money decisions you later end up
for my family, my wife and I took the advice I dole out
to readers about building a cash stash.
won’t call ours an emergency fund, because after a
while we didn’t view it strictly that way.
we viewed it as an opportunity fund.
wife hit a roadblock for advancement at her workplace
and wanted to take some time off, a mid-career hiatus.
been building sizable cash savings for years. We
surpassed the point at which we had enough to pay for
life’s unexpected expenses. But we kept adding to the
fund, which at one point helped us pay cash for a
one-year-old car. It also helped during a relocation
cash squeeze, supplementing a down payment on a new home
until the previous one sold.
would tap the fund and build it again. Along the way, we
enjoyed the ability to say no to extended warranties,
pay less for insurance by taking high deductibles, and
never pay a finance charge on a credit card because a
large expense arose. In that way, having the cash
allowed us to make choices that made life cheaper.
most important, however, was the emotional freedom the
fund provided. We got to the point where we viewed the
cash as a "take this job and shove it" fund.
If either of us got fed up at work, we could quit
without immediately having a new job lined up. We didn’t
have to be trapped in work that made us miserable.
my wife quit her job. The emergency fund filled the
income gaps of intermittent consulting work she was
10 months out of work, she’s rested, revitalized and
ready to resume her career full-time.
our family, our opportunity fund was a real example that
money can, indeed, buy happiness.
FUND FREQUENTLY ASKED QUESTIONS:
Who needs one?
Everyone whose life doesn’t always go perfectly —
which is to say, everyone.
How much do I need?
Typical advice is cash equal to three to six months of
bare-bones expenses — food, shelter and utilities. But
that dollar figure can be overwhelming. Start with
intermittent goals, such as $1,000, $2,500 or enough to
pay four months of the mortgage or rent. The amount you
ultimately need will depend on a variety of factors
including whether you have a two-income household — if
an emergency fund is to protect you from job loss,
families with two earners are less likely to have all
their income cut off.
Where does it fall among money priorities?
It’s a good idea to start with a small emergency fund,
say $1,000 or 2 percent of gross household income. But
then turn attention to high-interest debt, such as
credit card balances, before returning to the goal of
beefing up the emergency fund.
Does it have to be in cash?
Preferably. Cash gives you the most options and is
quickly available. But when trying to safeguard against
job loss, which requires a much bigger fund, consider
unused credit on credit cards, home-equity lines of
credit (HELOC) and even potential borrowing from family.
Where do I keep it?
Ideally, you would keep cash in a separate account.
Consumer behavior studies show we’re more likely to
keep our hands off it for discretionary spending because
of "mental accounting." We view that money as
unavailable. Don’t stress about earning decent
interest on the money. Think of it more as insurance
than an investment.
Where do I get the money?
A: Fund it with automatic contributions — an
electronic transfer from your checking account on pay
day, for example. Also fund it with lump-sum windfalls,
such as a portion of your income tax return.