15-Minute Resolution #4: Automate Your Emergency Fund

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It’s Friday, so here’s an easy slam dunk resolution involving emergency funds. If you’ve done any sort of financial reading lately, you know that many folks recommend having at least 3-6 months of living expenses put aside. Given the current high unemployment rates, I personally wasn’t comfortable until I had 12 months of expenses. Not only could you lose your job, but there could be unexpected health expenses, car repairs, or whatever. But that’s not the main point here.

The easiest way to build your emergency fund is to put it on auto-pilot. Your task for today is to schedule an automatic, repeating monthly transfer of $100 into a savings account.

Just about every savings account available allows you to set up an automatic monthly transfer from your checking account. Here is how to do it with Capital One 360’s Automatic Savings Plan. I just chose $100 as a round number, but change it as you like.

(Perhaps you’ve already got a healthy emergency fund. If so, then you can apply this resolution to another specific savings goal, like a new car fund or in our case a pet healthcare fund to replace costly pet insurance.)

Instead of telling you more reasons to do it, I’m going to try to counter any reasons NOT to do it.

  • Don’t wait until tomorrow. It won’t get any easier later on, only harder.
  • Don’t open up a new account, if you already have one available. If you don’t, one of the fastest applications I’ve seen online is at Capital One Consumer Bank. Takes less than five minutes.
  • Don’t worry about interest rates. It doesn’t matter if your savings account doesn’t earn as much interest as some of the top accounts. This can all be changed later.
  • Don’t worry about not being able to keep it up. Start with as much or as little as you feel comfortable. It doesn’t matter if it’s $100 or $1,000. I don’t even care if it’s $10.

The hardest part is starting. You can always change your mind later, it’s still your money. But hopefully, in several months you’ll wake up to a big chunk of money you didn’t even realize you saved.

See the rest of my 2010 Instant New Year’s Resolutions here!

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  1. Really. The motto here is “Just Do It!”.

    The size of the emergency fund should be twice the amount you think you might need.

    What I found is that emergencies come in cascade so you might think you need only $1000 but you might have a side emergency during the emergency so I would recommend x2 which is $2000.

    Of course this scales up or down to your emergency.

    For example I have $10k stashed for emergency. That way I feel cozy.

  2. I have 9 mos of expenses stashed away plus I would get 3 mos of severance per my contract. I will reduce my emergency fund to 3 mos once I feel the economy stabilizing.

  3. I agree, automating is the best and most painless way to save.

  4. I agree with Ryan. We have about 20k in emergency savings for a family of 4.

    I have two little kids and we’ve been to the ER once in the past 6 months for stitches. (boys will be boys…) Even with insurance, the copays and coinsurance still add up to a good chunk of change when you’re talking ER visits. Also it seems like something goes wrong with the car about every 6 months or so. Each trip to the mechanic seems to cost $300-400.

  5. I have about $20k in savings, but I won’t feel comfortable until we have about $100k. This kind of padding gives you the freedom to walk away from a job you don’t like with few worries.

    I’m probably going against any advice I’d get here or from a financial advisor, but I’m putting more money towards this savings account than retirement until I feel comfortable with it, then I’ll start putting a lot more in retirement. My wife and I were each putting in 6% to get max employer matching for our respective retirement account, but we put another 20% in savings. But the savings rate is not consistent – it drops to near zero during the holidays – travel, gifts, expensive holiday meals, etc.

    One thing I need is a better savings account. Yields are low across the board and I feel I have one of the better ones, but I need a higher yielding account that also allows sub-accounts. Any recommendations?

  6. Automatic savings is the way to go! It takes all of the psychological factors out of the equation. Most people spend what they have, so if it’s gone you can’t spend it and you get used to it pretty quickly.

    I think 12 months of living expenses in an EF fund is excessive though. Interest rates are extremely low right now, so having that kind of money just sitting around collecting minimal interest might not be the best bed. If you have 20-25k in your EF you should be pretty safe. Remember, a job lose would provide you with unemployment, so you won’t be draining your savings immediately. For families with 2 people working, you would still have 1 income as well. I think anything beyond 25k should be invested in a higher yield vehicle such as a Roth, 401k, or index funds.

  7. I could be convinced in having two tiers of emergency funds:

    a.) Cash I can access within days – I’d probably keep 3 mos worth in a high-interest savings account

    b.) Low-risk non-cash investments that I can access in 2-4 weeks – e.g. reasonably safe bonds, low-risk stocks etc. This should never be a 401k, Roth or other retirement account that you can’t access until retirement

    The problem for me is that right now the downside risk on b.) seems much higher than the the upside potential, driving me to stash everything in a.)

  8. I’m all for emergency funds, but I don’t see the need to get carried away. Can’t you borrow 10K from your roth ira if necessary? One should also consider how much security they have in their job and how quickly they can build up their reserves if necessary. Emergency funds are like insurance…they more you have the more it costs (since your money could be doing better elsewhere). Too much insurance is rarely a good thing.
    On a separate note, I’m surprised Jonathon to find that you were paying for pet insurance despite having like 100,000 liquid at one point if I recall. I would think the point of having such a large emergency fund would be that you don’t have to worry about insurance since you can afford to pay the hefty bill when necessary.

  9. MakingItWorkInNJ says

    I am going to be putting that $50 away now! Had I done this last year, the $847 I had to put on my CC would have been paid off. Now I will work to make sure I’m always covered for an unexpected expense and not depend on my credit.

    $1200 (MINIMUM) by the end of the year is something ANYONE reading this blog can do. I’ll set up my HSBC to take $50 every two weeks.

  10. I do this backwards.

    Everything goes into my savings account: direct deposit from work and any ATM deposits. Once a month I auto-transfer to checking enough to cover bill payments, a couple cash withdrawls, and the rare paper check.

    This approach works if your spending habits are already under control. Otherwise it might be easy to have the out-flow be bigger than the in-flow.

  11. MakingItWorkNJ says

    @Dave, borrowing or withdrawing from a 401k is never a good idea. In NJ government, workers have what’s called a 457(b) [deferred compensation] (exact same thing as a 401(k), just for government workers). How it works is that it supplements the pension you will get after 25 years of service (however you also have to have the age, which is 50, though to not get a percentage hit, you really need to be 55, though if you started work after 2003, it’s now 60.). Not to go too much into the pension details, but we’re not allowed to borrow from the 457(b). BUT we are allowed the “hardship withdrawal”. If we do invoke that, we cannot put it back in…it will count as a disbursement and we will get the sweet double tax hit as well as penalty. One of my good friends will be experiencing that because he decided after 32 years to get his teeth fixed and decided to raid it. I, however, would never do that. BUT what I will do is transfer ~ $20k (once it hits that number) via a rollover to my pension to buy back 74 months when I left government for two years (I used the disbursement because I was young and stupid). The transfer will instead let me BORROW a good deal of that money PLUS the $14k that’s already there. And because it’s a pension, it’s a better deal because the current payout is guaraneteed. [X amount of years you worked] / 55 is the formula for pension payments, so as long as I payback all of the money I borrowed before I retire, I’m guaranteed whatever I am supposed to get. So if people have a pension, it’s much better to borrow from that (assuming your plan allows) than borrowing from a 401k, etc. I don’t need to worry about “catchup” and all of that.

    As for pet insurance, as a pet owner of two dogs, it makes GREAT sense. I get 90% of whatever I spend on the dog. Plus payouts come out quick. So I don’t totally lose whatever I spend on a surgery. When I got my second dog, I insured her right away. My first one I was on the fence until I got the bill. Then I started right away. LOL.

  12. Makingitwork- Here is how I view it. Whoever is giving me pet insurance is expecting not only to get their money back, but they are going to make a profit too. Their profit has to be large enough to cover expenses as well as pets that are probably more vulnerable than mine, folks planning to abuse the system…
    You can get all sorts of extra insurances in your life. It makes more sense to insure yourself. Build up an emergency fund to cover things like your dog’s surgery, your car breaking down, your appliances going bad. Use the money you don’t spend on unnecessary insurance to help build up the fund. Why spend 20% or whatever on somebody else insuring you, when you can get 5% in the market to insure yourself. Obviously this doesn’t apply to big things like home owners insurance and such.

  13. Smartypig is an ideal place to have an emergency fund. Great interest rate and you can schedule monthly withdrawals as you’ve described.

  14. MakingItWorkNJ says

    I now have $100 saved up so far for January. I’m now going for $75 every two weeks starting in February. I am working my way up to $170 every two weeks. If I can get it to $170 biweekly, I’ll have $1000 every three months.

    How’s everyone else doing?

  15. My goal is to have $1500 in an emergency fund. Right now I have $200. I will do this like a 401 k by authomating the process.

  16. It’s true. Starting is the real challenge here. Once the important decisions are made (where and how much to save), developing the habit of saving is just a matter of time after that…

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