Wednesday, September 19, 2007

Shelter from the Storm

There's a lot of howling in the winds that blow down Wall Street, and it's a perfect time to bring up the inevetable. There will be a moment when you're just plain $h*t out of luck. You won't have the Fed discount the rate at which you can borrow in order to bail your lame a$$ out of monetary self destruction, no, your credit card will probably increase its APR when all is said and done, so unlike Wall Street, there are no handouts for you. We all need a little shelter from the storm.

Okay, maybe its heresy to work Bob into a blog about $$$, but that is the best way to describe an emergency fund. A financial emergency is when you need more money than you are making (or not making, as it may be) in order to eat at your table and sleep under your roof. You can get canned, downsized, change jobs before you actually find a job, lose your lease, lose a roommate and gain the whole lease, have a family emergency that requires a leave of absence, have a kid that requires you take an unpaid maternity leave, break up with your girlfriend, the list is endless. The other problem is that if you have any kind of job that is not bona fide nine-to-five, you have an unpredictable wage, my friend, and you need an emergency fund more than the next guy reading Money magazine and nodding his head saying, yeah I know this already.

I feel like having an emergency fund is tied for first place with having zero credit card debt in the financial must-haves category. Even though it is faster to funnel all your money to pay off any revolving credit card debt (meaning any debt you don't pay off monthly and hence chuck change to an interest rate), some people have debt that will take them years to knock off. You simply can't wait that long to accumulate your emergency fund, because chances are the emergency won't wait that long.

The question now is, how much do you save? Standard answer is three to six months of living expenses. I'm talking rent/mortgage, monthly bills, food. I'm not talking about the monthly cable bill, but I would be talking about the car insurance. I would add student loan payments. Some would argue you could defer them, but if you can save for it I say add it. You want to add up the bare bones expenses, and cut the fat. If you have credit card debt, include the minimum payments. The amount of months you save up for is the amount of months you feel are the most you could conceivably be without work. It's the amount of time you would be unemployed and absolutely freaking out. While unemployment isn't the only financial emergency, it's the most expensive one likely to happen.

But don't be fooled, it's not just about sheltering you from a financial emergency, it's about sheltering you from the financial consequences of trying to survive the emergency; maxing out your credit cards to live, losing your apartment because you can't pay for it, taking on some nut job roommate you found on craigslist while you sleep on the couch, liquidating your IRA or borrowing against your pension, playing lotto to pay the mortgage, taking a cash advance on your credit card, or moving back in with your parents because you got kicked to the curb.

Listen, you're already staring at a computer screen. Go to your internet savings account and start saving a little every month. Set small goals. Let's say you need six grand to cover three month's expenses, just start saving for a thousand bucks. Know the big picture, and chip away at it one step at a time. Trust me, you'll sleep bettter at night.


Ms. M&P said...

This is super motivating. I actually found myself ready to open an online savings accout right now even though I already have one! This is such good advice. It's actually made me rethink my current plan. I have about a $300 EF and I'm putting everything towards debt that I can. I basically add pocket change to my EF, but will start adding more in January...but I hate not having a good EF. ugh. The joys of not having enough money!

PiggyBankBlues said...

Hey, a little at a time is all you need. Also, paying off your debt is a huge priority that should definitely get the most of your money.

I've drained my EF being temporarily unemployed, so I've got a lot of catching up to do myself!

Ms. M&P said...

Thanks! That makes me feel better. You have great advice, btw. I'll probably be asking you tons of questions once I'm able to get started on a real plan and not just debt reduction!

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