Your emergency fund should be for an EMERGENCY! Not, “I really, really want to go to this concert,” or, “I really need a diamond studded dog-collar for Tinkerbell.”
Everyone’s definition of an emergency is different. But, if you want it to be of some use to you, you need to have a strict definition of an emergency.
Your emergency fund is what you should turn to when “life happens.” It will be what you turn to rather than your credit cards.
Leverage your emergency fund
Also, your emergency fund should put more dollars into your pocket once it has been well established. Here is how:
- You start putting $100 a month into a high-yield savings account. This will not generate much income, but it will do a whole lot better than spending the money.
- After a five months, barring no emergencies, you will have $500 in your high-yield savings account earning a nice interest rate. Now you can call your car insurance company and ask them to raise your deductible from from $100 to $250. Since you have $500 set aside for an emergency, you will now be able to afford the $250 deductible.
- The good news is that when you raise your deductible, your insurance bill goes down. Now that you are saving $120 a year on your insurance bill, you can add that to your emergency savings. Instead of saving $100 a month, you can now save $110 a month ($120/12 months=$10) with no extra money out of your pocket.
- Now that you are adding $110 a month to your emergency fund each month, it will grow even faster. In a few more months, you will reach $1000 balance. You can call the insurance company again and ask them to raise your deductible to $500. Again, this will lower your insurance bill even more. Add the difference to your emergency savings and keep this cycle going.
- As you can see doing this over and over again will save you money, while expanding your safety net. Your bank account will be growing at a faster pace and you will have more peace of mind.
The figures used are hypothetical and I would suggest raising your deductible only to a level that you are comfortable with. But remember, you are paying a lot of money to the insurance company to have a low deductible.
Keep letting your emergency fund grow larger and larger and shoot for a dollar amount that would cover 3 months of your living expenses. Once you get to that point, then you should start looking at investing in mutual funds or stocks to get a better return on your money.
{ 13 comments… read them below or add one }
Personally, I use a structure of 6 month’s savings, but I absolutely agree with using it to leverage your financial situation. No, 3 or 4% isn’t all that exciting, but it moves your money forward.
Couldn’t agree with you more.
Excellent advice on increasing your emergency savings fund. Today it takes longer than ever to replace your income if you lose your job. With the unsteady economy, we are recommending that you work to establish 15 to 18 months of expenses in your emergency fund. The first six months should be liquid in a high interest money market savings account. The rest should be in multiple 3 and 6 month certificates of deposits.
I totally agree with this. It’s not much, but think back 12 months ago, and ask your self if you remember wanting to build your emergency fund then, assuming you were debt free. If you had taken this advice then you would at least be $1200 richer.
It is sad how many people are in debt and could not even consider trying to attempt saving for an emergency fund. Great post — it is definitely an underrated topic but it’s extremely needed in this shaky economy. Who knows when you are suddenly let go from your “secure” job? Nothing is permanent these days and you need a fund for those unpredictable times.
What a great idea, I will be checking on it today.
Excellent strategy Bob. I like that it’s easy to implement and effective.
It would be fun once you have enough money in your emergency fund to start investing in better-performing index funds or ETFs.
Hi Bob,
This is a great article. I always enjoy to read your financial advice! Thanks!!!
Milly
Bob,
This is an excellent post. I just recently started putting $50 a week into my savings account and It’s amazing to see how much it grows after 5 months. Now I’ll have to look into changing my deductible on my car insurance! Thanks for the great advice.
Aaron
Hi Bob,
I leveraged my emergency savings about a year ago by dividing it into thirds. I couldn’t take the low rates anymore, so I put one-third in a Ginnie Mae fund and one-third in a short-term investment-grade corporate bond fund. Both have considerably higher yields without much extra risk. Share prices tend to be relatively stable. So far, so good.
Robert
Well said! I have played this game with my health insurance but just didn’t think to do it with my auto insurance. I’ll get right on it! Thanks again!
After I read this, I took my $900 cash emergency fund, and deposited in the bank from which my house payment is taken. They charge $12 per month unless you have $1500 minimum balance, so that seemed like a better use of the money.
I only use the account for the mortgage payment, after they solicited us to re-finance to a lower rate, we were informed they knock another point off the interest rate if the payment is EFT’d from the bank.
It is always wise to set aside funds for emergency. Many financial experts advise to keep at least 6 months of your monthly income in your emergency fund. I agree that you should make the emergency fund work much harder for you. So instead of putting it in ordinary savings account, place it in time deposit or high earning savings account. If no emergency occurs, then your funds will continue to grow and you can be on your way to becoming rich.
It is always wise to set aside funds for emergency. It is always wise to plan ahead. Many financial experts advise to keep at least 6 months of your monthly income in your emergency fund. I agree that you should make the emergency fund work much harder for you. So instead of putting it in ordinary savings account, place it in time deposit or high earning savings account. If no emergency occurs, then your funds will continue to grow and you can be on your way to becoming rich.
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