Emergency Savings
A lot of the frugal gurus out there point out to their audience the importance of emergency savings accounts. I’ve had one for about 3 years. I always keep this account as far out of reach as possible. I explained the importance of barriers in another post. The reason I keep it at a distance is to make me think long and hard before I tap that fund. In the event I needed to access the cash quickly I could always put it on a credit card and wait a few days for the funds transfer to execute to my checking account. I strongly recommend that you keep this fund in a high interest savings account. The online accounts HSBC and ING offer are perfect for such funds.
Set Aside Enough
The amount of money you keep in this fund is also important. Dave Ramsey recommends his viewers keep $1000 in these accounts until their debt is paid off. In his mind it is more important to pay down the high interest credit cards and other debts until you boost this fund up further. I take a slightly different approach because my situation is different. The only debt I have is my student loan. The interest on this loan is fixed at 3.65% which I feel is quite low given where interest rates could go. What I have done is added $1000 every 3 months to my emergency savings. I have set a goal of 8 months worth of living expenses before I stop funding this account. For example I initially saved $1000 and then focused on my student loans for 3 months. Then I stopped paying above the minimums on this account and focused on boosting my savings goal up another $1000. I will keep repeating this until the entirety of the student loan is paid off. I feel this gives me psychological strength in saving for other needs that may arise.
Make A Goal
Ultimately I wish to save for a house which would require a 20% down payment in today’s market. I also mentioned my clunker is in rough shape. If I do have to buy a newer car for some reason I will not finance it. I intend to pay cash for all of my vehicles from now on. Also life has an odd way of throwing unexpected curve balls at people. I may want to get married or take on other challenges at some point in my life. It makes me feel quite a bit better knowing that I have a small nest egg I can tap if I so desire.
Ideally you would like to keep your emergency savings account for a lay off or a tragic accident that would prevent you from working. The buffer this account can offer you is vitally important because the only other alternative is charging up credit cards for these expenses. Pick a goal for your account that makes you feel comfortable. After your debt is paid down and your account has a full year of monthly expenses in it then you can move on to investments. I will cover this in another article soon.
