I recently backed into a post. It was a 2 by 4 mounted at exactly the right height to merge with my car’s driver side tail light. I’ve never bashed out a tail light before, but there is always a first time. Is there ever a right time for this cost? No.
Total cost to replace said tail light $250. How to pay for it-cash or credit? Here is the argument for credit . There really isn’t one, unless I had no cash. Have you ever noticed how sometimes expenses exactly match up to your cash on hand? $250-paid in full. So the cash went directly to the car expense without stopping in my emergency fund.
One of the first questions that I ask my clients is how much is in your emergency fund? When I began working with clients in the 1980’s, the conventional wisdom was to have three months income as your emergency fund. When I began to teach, and answered the question wittily (I thought) :
“Three months income or expenses, whichever is greater”.
Then the number crept up to six months of income in the financial planning world. Suze Orman began to say eight months. In a recent column published by the Wall Street Journal, Rachel Louise Ensign made a good case for nine months. She explained that the “average duration of unemployment is nearly 40 weeks”. That is ten months!
If you have no emergency fund, not only can you not invest, but a simple car expense, apartment deposit, or unexpected dental bill can mess with your carefully laid out budget. What to do? Hopefully there are a few dollars that you can divert to an emergency savings account. Even $5/week is a good start. $20 times 12 is $240 that you didn’t have before. $40 times 12 is $480. How to generate that?
- Take your lunch to work
- Brew coffee or tea at home
- Walk to work one day a week instead of driving or taking the bus (not possible for everyone – I know)
- Investigate a carpool to cut gas expenses in half each month-save $50 or more this way
- Switch a monthly prescription to a generic instead or order by mail
- Extend the time between haircuts
- Get your movies from the library or the Internet-cancel Netflix!
- Stop paying for downloaded music (I get mine from the public library)
- Switch brands on a regular grocery item
- Quit smoking ( Someone I know saved $150/month with this one)
- Do I even need to mention the cable bill? Tip: ask for Limited Basic…
And here is the vital next step-hide that money somewhere where it can’t be spent! In an envelope, an online savings account or ask your HR department to send it directly to your savings account each payday. They’ll be happy you asked!
Right now, as you are building this up, the most important step is to create the habit of saving. Maybe the dollars only stay in the account for 2 weeks at first. But you have to do this part to get to the part where you can worry about how to get some interest on it. After you get to $500, go to $1000. And so on. Think of the account this way. Funds deposited there keep you from paying 13-22% on a credit card or installment balance.
If you are participating in your firm’s 401(k) plan and earning the company match, but have no emergency fund, consider backing the 401(k) deferral off 1% until you set up an emergency fund.
When the inevitable happens and you need a new tire, a replacement for the cell phone dropped in the bathtub, or to fix the stove, that’s ok. That is what the money is there for. Take a deep breath, go back to step number one and replace the funds ASAP.
You can’t save three, six or ten months of income for an emergency without putting down that first $5 bill.
The front side of a US $5 Hawaii Emergency Note (Photo credit: Wikipedia)
No Dollar Left Behind 
Excellent. I good reminder that even a small amount over time can create an emergency fund and make it possible to avoid at least in part using credit to fund unexpected expenses.
Thank you Marla. For people without access to credit (or with bad credit), an emergency fund is like a vaccine against future debt.