I’m somewhere over the Southwestern US heading into Denver for FinCon12. In the meantime, my friend Brent from OnTargetCoach has written a post prodding us all to have an emergency fund before we start running circles around our other financial goals (real estate, investing, etc). What do YOU think? Do you have 3-6 months of money stashed under a mattress somewhere? If so, please leave your address in a comment and make sure to keep your doors unlocked :). Check out his post to get motivated to set aside some serious cash!
A comment by Average Joe on one of his recent podcasts got me thinking about emergency funds. Most of the financial strategies we discuss are dependent upon having an emergency fund in place.”It all goes back to the emergency fund, doesn’t it?”-Average Joe
Wait, What is an Emergency Fund Again?
An emergency fund is where you pile up at least 3-6 months of expenses into a separate account for— emergencies of course! This is not a vacation account, but only to be used for times when you really need it (i.e layoff or unplanned trip home for a funeral).
Where Should I Save My Emergency Fund?
This is not an investment, but a savings account. Sorry, you’re not going to earn a lot of money off this, but as a bonus you’ll sleep much better at night. You can save this money in a high yield savings account to get a trickle of interest at least.
It All Goes Back to the Emergency Fund
Just like being out of debt allows for more choices in life, an emergency fund allows for more flexibility with your financial life. What can you do differently once you have an emergency fund in place?
Higher Deductibles on Insurance– Once you have thousands of dollars sitting there waiting for an emergency, you can begin to increase your deductibles on insurance: homeowners, car, disability, and health insurance policies. This is a huge deal! When you increase deductibles, you’re decreasing your monthly payments to the insurance companies AND increasing monthly cash flow—which allows you to save or invest even more!
Cut out Credit Cards– With an emergency fund you won’t need credit anymore to bail you out of a sticky situation. You can literally cut out credit cards from your life should you choose (Think Dave Ramsey with his large scissors).
Invest More– Once you can sleep well at night knowing that your emergencies are taken care of, you can begin to invest or invest more in your retirement or other cash earning options.
Buy or Save for a House– Having an emergency fund in place allows you to pile up cash for a down payment on a home. You’ll want a a good sized emergency fund when you buy a home to prepare for unexpected repairs and other costs associated with homeownership.
Make a Career Change– If you know there are 6 months of expenses in the bank, there is more security to switch careers or start a new full time business. This cushion allows for a softer landing than just quitting and starting a venture that must create income immediately.
Having an emergency fund may not be exciting, but it forms a solid base for your life long financial plan. It really does all go back to the emergency fund.
If you don’t have an emergency fund, start one today. If you have an emergency fund, how has it been a benefit?
This is a guest post written by Brent Pittman from OnTargetCoach.com– Brent is financial coach and personal finance writer who believes the topic of money should be understandable and accessible for everyone. He’s also a sucker for donuts. Follow him on Twitter @ontargetcoach