Emergency Funds – How an Efund will Save You

Happy Fri-YAY! everyone! Will that ever get old? Probably. Will I start using something more original as an opener? Maybe one day! Hah! It is another Femillionaire Friday and I’m super excited because this is two Fridays in a row! How long can I keep it up, the world will never know.

Okay- great intro, Meredith, now to the point.

I want to write about Emergency Funds and why you need one, why your grandma needs one, why your dog needs one, and remind you of all the horrible things that happen when you don’t have an emergency fund.

First, do you want to know something terrifying? 56% of Americans can’t cover three months of expenses.

What is an Emergency Fund?

An Emergency Fund is a type of savings that is held in a savings account and used when an “emergency” occurs.  Generally, this is 3-6 months of living expenses, but all situations and plans of precaution are different. Expenses are inclusive of your mortgage/rent, food, kids daycare, insurance, electricity, trash/sewer, pet food, vet visits, gas, general car maintenance, student loans, personal care, etc. Any expense you currently have, don’t think of cutting it out, include it! I think a lot of people do this with child care, thinking they’ll be home, but you’ll be home and busy editing your resume, going on job hunts, and maybe even catching up on some work around the house/apartment!

What Constitutes an Emergency?

An emergency is anything that meets the UNU criteria:

Is it Urgent?

Is it Necessary?

Is is Unexpected?

This is where you need to build AIM (Awareness, Information, and Management Skills) when it comes to your finances. You need to be aware of how much you spend and use that information to manage your accounts!

A perfect example of this is car maintenance. You know a new timing belt is going to be needed at your next oil change, so why dip into your emergency fund? Save for that piece of car maintenance as best you can! I personally don’t measure out the price of maintenance (I hate dealing with cars), but I budget around $600 a year for car…. stuff. And if anything goes over that, I do dip into my Efund.

true emergency is something you absolutely cannot plan or expect.

 

The most common reasons to use an emergency fund:

  • Loss of Job
  • Necessary travel (ill family member or death, NOT a wedding)
  • Car repairs
  • Unexpected medical bill
  • Unexpected pet illness (Save for your pets!)
  • Heater or A/c went out in unfavorable temperatures
  • Necessary and Urgent Home Repairs
  • Use to cover before insurance pays out

 

NOT Emergencies

  • Christmas
  • Birthdays
  • Spur of the Moment travel
  • Going out with friends

 

… What happens if I DON’T have an emergency fund? It’s Risky…

Have you ever been stressed out before? Was it about money? That’s EXACTLY what not having an emergency fund feels like, overwhelming, compounding stress that you can’t control the situation you find yourself. One of the main issues in marriages is money. One of the main causes of depression is money. You know what solves some of life’s biggest problems? An emergency fund!

Some more extreme examples include homelessness, being hungry, losing your home, or taking on bad debt (i.e. credit cards) and finding yourself in even more stressed out.

An Emergency is the definition of peace of mind.

 

Let’s talk about the Beneies- the Benefits of an Emergency Fund

The largest benefit of an Emergency Fund is peace of mind, aka not being stressed. When your car needs a new tire- or four and you can pay for them, it’s the easiest “yes” you will ever say. You might even get a little high from the sheer adrenaline rush of not having to worry about the expense.

The second largest benefit of an emergency fund is it stops you from taking on bad debt. Aka, it stops you from taking on debt with high interest rates that make you more stressed to pay back.

The third benefit is somewhat indirect- having an Emergency Fund teaches you to not spend money. Having a lump of cash in the bank takes huge amounts of self restraint to not spend. And if you can keep it there, you’re absolutely killing the mental game of savings.

 

How the Hell am I supposed to Build an Emergency Fund??

I’ll tell you right now, it’s going to take time, patience, and intelligence to finally have your emergency fund, especially if you already have a tight budget. My recommendation is to save at least 10% of every single paycheck into a savings account until you have the amount of money you need.

You can help yourself by opening a High Yield Savings Account outside of your current bank and set up automatic transactions. This means when you login to your normal checking account, you never even see your Emergency Fund.

If an emergency happens while you’re building your emergency fund, take a deep breath, use your cash, and start building again.

 

Meredith Foxx’s Approach to an Emergency Fund

What’s my personal approach to an emergency fund? I use my emergency fund for only the most true emergencies, aka loss of job. I have had to dip into it once for my cat and once for my car, but for the most part, I like to structure my savings.

I have accounts labeled (and yes, these are all seperate savings accounts):

  • Car account – $106/pay period, this is for gas, insurance, and $600 of maintenance a year
  • Kitty – $30/ pay period, this is for food, toys, clothes, and vet visits. Any excess I’m saving for a surgery he’ll need.
  • Travel – $200/pay period, this money isn’t used for any unexpected bills (although I could for unexpected travel), but I think it’s important to point out where my cash goes
  • Efund/General savings – $300/pay period, while my Efund has been maxed out for a couple of years now, I am in the beginning stages of saving for a house and other big purchases. I have all of this lumped into one high yield savings account. But I know, $10,000 of what’s in there is an emergency fund.

 

Really think about the Amount you Need

There are a couple of reasons why you should think critically of what you need. The more important one being, will you have enough money? 3-6 Months is the standard, but if you have a large mortgage, kids, a spouse that doesn’t work, pets, loans, a job that is high risk, etc, you might want to consider 12-24 months of cash reserve. You’ll be prepare when the shit hits the fan, especially because when it rains, it pours.

If you’re young, healthy, no pets, no dependents, etc, really think about not holding onto too much cash. You’re losing time in the market by keeping dollars in an account that doesn’t even keep up with inflation.

 

In Conclusion

I hope halfway through this article you opened up your bank account and started a new savings account called EFund. Having an emergency fund is so critical to being able to handle stress and impactful moments in life. An Emergency Fund takes the edge off and allows you to breathe easy, knowing you’ll be okay.

I know saving money isn’t always easy, but it’s so much better than the alternative.

 

I hope you enjoyed this article, thank  you for reading! Check out my Youtube video for more:

 

Savings vs. Investments – Aren’t they the Same Thing?

Happy Femillionaire Fri-yay! Well… Not so Fri-yay as this post goes up late…. You know what my plans are for the week? Get. Shit. Done. Same as any other week. But I still love Fridays, mainly because it means new Finance tips on my Youtube Channel and here! Yay!

In this first post of 2019, and the first video in my Youtube playlist, Femillionaire, I want to start with a two basic definitions that can alter you from being comfortable, to being wealthy and financially independent.

Savings vs. Investing

I want to touch on the topics of savings and investing today and the key differences between the two.

Definition

Savings

Generally savings are in cash accounts held at your local or online bank.

Investments

Investments are investing in something with the intent to see your money grow.

Savings are held, investments are for growth.

Examples

Savings are cash in a savings account at your bank. You might keep savings in a checking account (which isn’t a great idea!). Savings can also be stored in Money Market Funds.

Investments are stocks, mutual funds, property, gold, or even in yourself. Anything that invest X gets you Y, where Y > X.

Purpose

Savings

Saving money in a bank account has one soul purpose. It is short term money that you need in order to fulfill a want or necessity. There are a few things that need defined in that sentence.

First, short term. What is short term in terms of your money? Short term is anything less than five years. So, any savings should only be done for something that is 5 or less years away. This includes a house, a car, a new purse, a baby, etc. Short term also mean urgency, if an emergency happens, you need cash now. 

Let’s break down the second part of that sentence, fulfill a want or necessity. Yes! Savings isn’t just for a rainy day fund (or to the more financially aware student, Emergency Fund), but is also for fun things like vacations, big projects, etc.

The final intent of savings is that it will be spent. You just may not know when.

Investments

Pay attention! This is where  we go from cash rich to actually wealthy. The purpose of investments is to increase one’s wealth by converting one amount of money into a larger amount of money. The purpose of investments are that they take time, mature, and when they mature your money has doubled, tripled, or even quadrupled- something you certainly wouldn’t see in a savings account. Investments also aren’t actively spent until they’re used to help fund your retirement or your next big project.

 

Returns

Savings

Savings is going to have very little returns. I highly recommend parking any large amount of cash you do have (>$3,000 saved) into a High Yield Savings Account. These accounts will at least earn you 2% as of me writing this article. My current Synchrony account is at 2.2%.

Investments

Investments, historically, have a much higher rate of return than savings, primarily because they increase in value over time. While investments may decrease for a short amount of time, history proves investments increase wealth and net worth.

Risks

Savings

I know what you’re thinking. You’re thinking “gotcha bitch” TRY to tell me that savings is risky and a bad idea.

… Okay, I will. Savings is incredibly risky when it comes to your money.  Are you going to suddenly have pennies, like you could with an investment? No. you’re just losing critical compounding time in the market when your money could be working for you.  Also, you technically are losing money…. if inflation is greater than your savings account rate, which, it most likely is. So the $100 you have in savings today, is still going to be $100 in 10 years, but worth only about $80 of today’s dollars.

Investments

I think it’s quite obvious why investments are risky- it’s why many people, especially women, don’t invest to begin with. Investments could be $5,000 one day, and $0 the next. If you invest in a company and it goes Bankrupt, you’re out of luck. If you buy a house and it burns down before you can buy insurance, you’re out of luck.

What we need to realize that yes, stocks, real estate, etc are all risky. However, with due diligence and staying the course, especially when things are going south, Investments out perform cash. Every. Single. Time.

Liquidity

The availability of liquid assets, i.e. cash.

Savings

Savings are quite liquid. You’re able to pull out all the cash you need, generally on a single day, from a single bank. Liquidity is one of the key reasons for keeping cash.

Investments

Investments are not as liquid as savings, however different Investments have varying levels of liquidity. Stocks in a normal, health year of investment are pretty liquid. It easy to sell stock and have the money in your bank account less than a week to two weeks later. Real estate as an investment is a different breed. One can flip a house, or sit on it for month – even years – until someone wants to buy or rent it from you.

 

In Conclusion

I hope the difference between savings and investments is clear to you now. In a way, investments, especially buying into mutual funds, are basically like saving with a slightly better interest rate. That is, until you have enough money where compound interest really takes root and you see your numbers start to soar.

After this article, I hope you are able to correctly discuss savings and investments and continue to invest and grow your wealth!

 

For the more audio readers, below is my Youtube video covering the same topics as above. Thanks!