Sunday, March 3, 2013

Lesson 2: Emergency Fund


Financial Planning for the Recent Graduate





Has anything unexpected ever happened to you?  Has your car ever broken down and you didn’t have any money to fix it? What did you do?  Put it on a credit card, where you get charged 20-25% if you don’t pay it off at the end of the month?  I’m here to tell you that those days are over.  Credit cards aren’t for emergencies any more.  In the last lesson, we talked about putting money away into a savings account. Now we’re going to define it.  This savings account is called your emergency fund.   This is going to be your first savings account that is not linked to your primary spending account.  What do I mean by that?  For the first time, we’re going to put space between you and your money.  You're a graduate now, a mature adult in the real world, so it's time to start making mature decisions with your finances.  

Did you ever have a blanket when you were little?  When I was a toddler, I had a blanket that I called my “white mine”.  It had boogers, snot, drool, tears, dirt and dust all over it.  It started as a white blanket, but turned a different color very quickly.  It was mine, and I wouldn’t give it up.  I never switched to a new, clean blanket.  Fast forward 20 years and we’re doing the same thing with our finances.  We don’t want to change our behavior because it’s ours, and the worst part is, we defend it!  I need a new car with a car payment…I deserve to go out because it was a hard week…I have to live in this nice place that I can’t afford. This is the lesson that we start to change your behavior, and what you’re used to doing with your money.  Step 1 was getting you on a budget.  Step 2 before you do anything else is to save $1,000 for your emergency fund. 



There are tons of great options for a savings account for your emergency fund.  Make sure there is no minimum balance requirement and no annual fees on the bank account that you open.  You don’t want the bank to eat away the hard earned cash you’ve saved.  There are great no-fee online banks that pay up to .9% interest just to save your money with them, and there are also great local community banks that won’t pay as high of interest, so it depends on your preferences.  I personally use Ally Bank for my emergency fund, and they are my #1 choice for an online bank.  

Now I’ll tell you what an emergency fund is NOT.  An emergency fund is not rescuing your butt at the end of the month if you didn’t budget enough money for food.  It is not  money you use for an occasion you forgot to save up for, like Christmas, or an anniversary.  If you have a savings account linked to your checking account, and you overspend on your checking account, your bank probably moves your money from your savings account to your checking account to make up the difference.  That is NOT a savings account.  That’s just an extension of your primary spending account.  An emergency fund is NOT money for that cute dress at Banana Republic, or that nice suit you have to have.  Your emergency fund is for emergencies.  If it's not an emergency, don't touch it!

I recommend attaching a checking account to your new savings account, because if you’re really in a pinch (you’re out of money in your main checking account) and you have an emergency, you don’t want to wait 2-3 business days for your money to transfer to your main checking account.  When you open your checking account, they’ll usually give you free checks, so just put those in a safe place until something unexpected happens and you need the cash.



The most important thing to understand is that emergencies do happen, all the time.  Grandma and grandpa had it right all along with their rainy day fund.  Unexpected things will happen to you, and when you have an emergency fund in place, it puts a big buffer between you and life’s curveballs.  Murphy’s Law takes a whole new meaning when you have the money saved up.  When you have an emergency fund in place, it’s your Murphy repellant, and you can stop worrying and stressing out when your car won’t start, because you can fix it.  Don’t let life happen to you.  Let you happen to life.



Tip 1: GO!  Start now.  Don’t wait.  This is the easiest step to complete, but it’s also the hardest one.  If you commit to the emergency fund, you’ve committed to turning your life around.  Get it done quickly!  Squeeze your budget, and whatever’s left at the end of the month, roll it right into your emergency fund.

Tip 2: Get a part-time job to add to your income.  Do some contract work.  Start monetizing your skills.  If you craft, set up an Etsy.  You’ll get some serious momentum if you’ll take a few hours per week working part-time somewhere.  You can’t save money if you don’t have any coming in, or if it’s all going out the door.



Tip 3: Sell stuff you don’t need!  I know you have some stuff around that you never use that someone else may want.  Amazon, eBay, Craigslist, get to it. 

Tip 4: If you have room in the budget, set up an auto draft into your emergency fund at the beginning of the month.  You might miss it the first month, but you’ll get used to it soon!  If you haven't made yours yet, here's the monthly paycheck budget, bi-monthly paycheck budget, and weekly paycheck budget.

Tip 5: Start a mini-emergency fund.  Discipline yourself by starting a checking account buffer in your primary spending account.  Set an amount that you refuse to go below, and increase that amount every month.  This way, you won't have to pay overdraft fees if your account hits $0 (when I was first starting out, I overdrafted all the time, and it's an easy way for that Wendy's double cheeseburger to cost $37, instead of $2.)  According to Dailyfinance.com, banks make over $30 billion a year off of our overdraft fees.  Make yourself believe that $500 in your account is actually $0, and don't go below it!

Check out this week's supplemental YouTube video:
http://youtu.be/J_R1wmPdNNE

What are you going to do to save up $1,000 for your emergency fund?  Leave a comment below.  Your tips may give someone else a great idea on how to save.



Images courtesy of freedigitalphotos.net

By Naypongimage ID: 10077125, by Stuart Miles, image ID: 100142024 and image 10055016, by m_bartoschimage ID: 10012082, and by Ambro, image ID: 1066149

4 comments:

  1. Hey Eric! I'm really enjoying your youtube videos and blogging. I saw on facebook how you paid off all your student debt (über jealous...btw) and I'm intrigued on how you did it so quickly! At this rate, I'm going to be paying until I'm in my 30s :\ but maybe your advice will help me avoid that disgusting fact! I do a lot of the things you mentioned already, so I think (hope) I'm on the right track. You asked for comments because it might help someone else, so here's mine: I'm pretty good with my budgeting because I don't have an option not to! My paycheck covers rent, student loan payments, utility bills, and that's about it (I always put 10% into savings though!). I'm lucky that my school district pays for gas costs around town because I'm between schools throughout the day.

    I have a unique situation though that I'm very blessed to have - I have a private violin/viola studio with about 10 students that supplements my income greatly. If it weren't for that, I probably wouldn't eat! It's only an extra 5-6 hours per week or so, but it adds usually an extra $700 to my pocket every month! I use that for my tithes, groceries, restaurants, "fun" money, etc. I'm only fighting 2 issues at this point: 1) I want a new car but don't want (er, can't afford) a monthly payment (due to student loans...), and 2) Some of the parents are soooo slack about paying me on time!! I guess that's a personal problem I have to figure out....but it is quite annoying.

    Anyway, I'm excited to learn more about how I can reduce my student debt. I cannot even IMAGINE the kind of saving I could do or freedom I could have if they didn't exist. Heck, I could save up to pay for grad school! ;)

    I downloaded your excel spreadsheet for the budget thing and for people who have Wells Fargo, it takes a lot of the guess work out of it for you - just click on the "My money map" tab from your home screen and it will categorize payments you've made for you, and even do averages and pie charts and all sorts of fancy stuff. (But I must admit, I had to watch your youtube video for help, so thanks for that!)

    Keep it up, Eric! Can't wait for the next lesson!

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  2. Thanks for the comment, Noelle! I lived on about $9,500 in my first year out of college (yeah, frugal.) I was also blessed to have a second job during this time, and applied all of the money I earned from my second job directly to my loans. After I had my emergency fund set up, this was my number 1 personal goal before I got married. You can knock this out before your 30s!

    I'm glad to hear about your studio job - that's an incredible side gig! Any way to grow that business a little bit? As for the car situation, don't buy a new car. I've been driving around in my 1995 Honda Accord with 267,000 miles on it, and I'm going to drive it into the ground. A new car is one of the worst investments I've ever heard of..I'm seeing them pop up all over my friends' Facebook statuses and it's killing me because I'm not on that lesson yet, but a new car loses 20% of its' value in the first year, and 65% of its' value by the 5th year. Best bet is saving up and paying for a good used car with cash.

    Great recommendation with Wells Fargo - I love Mint.com as well. You can import any of your accounts all into one website. It sounds like you're doing all the right things with your finances - keep up the great work, and thank you again for reading!

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  3. I seriously wish I had known how to budget and the importance of an emergency fund a year ago. I had two jobs last summer, made a solid amount of money, and - in stereotypical college student fashion - basically blew it all in 3 months on booze, clothes, and concerts. I only just figured this stuff out in January and have saved up almost $400 for my emergency fund in the last two months from one part time job during school. Unfortunately, there's a high chance I'm going to be stuck paying it out in taxes because my education fund is counted as income. Small price to pay for no debt, but a big lesson for me if I hadn't gotten my act together!

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  4. Thanks for posting, Alexis! Glad you're on the right track.

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Thank you for your comment. I look forward to helping you.