dustinkidd.blogspot.com
What is it? Readily available funds that you can use to pay for unexpected needs in life. One of the biggest things to plan for now is the possibility of being unemployed.
When to do it? Right away, if you don't have any emergency funds at all. Once you have $1000 set aside, go back to working on your high interest debts (esp. credit cards). After those are paid off, then built the fund up.
How much do I need? Advice ranges from $1000 to 8 months of expenses. I'd aim for 6 months.
How do I calculate 6 months of expenses? It's not half of your annual salary. Don't calculate your emergency needs based on your salary, calculate them based on your expenses. If you have a budget, you can do this quickly (and if you don't have a budget, you'll be able to make one quickly after planning for your emergency fund). Start with your fixed expenses like rent, cell phone bill, loan payments, etc. Then, estimate your variable expenses like food and entertainment. You want to estimate liberally, even though you will spend conservatively when you actually need these funds. I was especially liberal with the entertainment budget. People who are unemployed have a lot of time on their hands and it becomes very easy to start spending money on movies, drinks, etc., just to stave off the boredom.
Do not include taxes or retirement contributions. It doesn't make any sense to contribute to your retirement when you're not making any money.
So calculate one month of expenses and then multiply times 6. Voila. That's your target emergency fund.
Where do I put it? You don't need to leave it in a zero interest checking account. This is money you're going to sit on indefinitely, it might as well be making some interest. Find a high interest online account like ING. (NB: High interest accounts are not that high right now. I opened my ING account a few years ago at 4.5%, but now it's at 1.3% and that's the highest I can find.)
You can also put some of your emergency fund in your Roth IRA. Why? Because you can always withdraw your contributed funds from a Roth at no penalty whatsoever. You just can't withdraw the earnings. So, if you never use your emergency fund, then it's tucked away as extra retirement money. What you can contribute varies, but generally single people making less than $105K can contribute $5000 per year.
I suggest putting $1000 in a savings account first. Then, every year, the first $5000 you save goes into a Roth and any money thereafter goes into the savings account. I double checked this advice by tweeting Suze Orman and she agreed. Put $5K of emergency funds in the Roth.
(Note that you can also use your Roth to save for a home. When you're ready to make a down payment on your first home, you can withdraw your contributed funds AND $10,000 in earnings, without any penalty or fee.)
How do I save it up? Scrimp and cut as much as you can to get that first $1000 in quickly. Then, once you have your target amount set, create a savings plan to get you there in a reasonable time frame. Unless your income is high, you are unlikely to save 6 months of expenses in less than a couple years. If your target is $20,000 in emergency funds in 2 years, then you need to save $830 per month! If that's not realistic, you need to work on your budget so that you can a) save more and b) live on less (thus lowering your target emergency fund amount).
What is it? Readily available funds that you can use to pay for unexpected needs in life. One of the biggest things to plan for now is the possibility of being unemployed.
When to do it? Right away, if you don't have any emergency funds at all. Once you have $1000 set aside, go back to working on your high interest debts (esp. credit cards). After those are paid off, then built the fund up.
How much do I need? Advice ranges from $1000 to 8 months of expenses. I'd aim for 6 months.
How do I calculate 6 months of expenses? It's not half of your annual salary. Don't calculate your emergency needs based on your salary, calculate them based on your expenses. If you have a budget, you can do this quickly (and if you don't have a budget, you'll be able to make one quickly after planning for your emergency fund). Start with your fixed expenses like rent, cell phone bill, loan payments, etc. Then, estimate your variable expenses like food and entertainment. You want to estimate liberally, even though you will spend conservatively when you actually need these funds. I was especially liberal with the entertainment budget. People who are unemployed have a lot of time on their hands and it becomes very easy to start spending money on movies, drinks, etc., just to stave off the boredom.
Do not include taxes or retirement contributions. It doesn't make any sense to contribute to your retirement when you're not making any money.
So calculate one month of expenses and then multiply times 6. Voila. That's your target emergency fund.
Where do I put it? You don't need to leave it in a zero interest checking account. This is money you're going to sit on indefinitely, it might as well be making some interest. Find a high interest online account like ING. (NB: High interest accounts are not that high right now. I opened my ING account a few years ago at 4.5%, but now it's at 1.3% and that's the highest I can find.)
You can also put some of your emergency fund in your Roth IRA. Why? Because you can always withdraw your contributed funds from a Roth at no penalty whatsoever. You just can't withdraw the earnings. So, if you never use your emergency fund, then it's tucked away as extra retirement money. What you can contribute varies, but generally single people making less than $105K can contribute $5000 per year.
I suggest putting $1000 in a savings account first. Then, every year, the first $5000 you save goes into a Roth and any money thereafter goes into the savings account. I double checked this advice by tweeting Suze Orman and she agreed. Put $5K of emergency funds in the Roth.
(Note that you can also use your Roth to save for a home. When you're ready to make a down payment on your first home, you can withdraw your contributed funds AND $10,000 in earnings, without any penalty or fee.)
How do I save it up? Scrimp and cut as much as you can to get that first $1000 in quickly. Then, once you have your target amount set, create a savings plan to get you there in a reasonable time frame. Unless your income is high, you are unlikely to save 6 months of expenses in less than a couple years. If your target is $20,000 in emergency funds in 2 years, then you need to save $830 per month! If that's not realistic, you need to work on your budget so that you can a) save more and b) live on less (thus lowering your target emergency fund amount).
Comments
Post a Comment