Feeding Your Emergency Fund

Last week, just shy of 400,000 Americans filed a jobless claim for the first time. Next week, my former supervisor will be one of them.

To call Kate just “a former supervisor” is a gross – and egregious – understatement. Kate was an office innovator, an office inspirator (yes, I made up that word; we’ll chalk it up to artistic license) and an office ego. She revolutionized the way our office worked, collaborating with everyone from the janitor to upper management to make sure everyone’s ideas were heard and – if warranted – implemented. I fear, however, that her supremely successful roles as an innovator and an inspiration were overshadowed by her ego.

When I first began working under Kate, I found her bold, brash and arrogant. She was a woman who knew what she wanted and knew exactly how to get it. Unfortunately, her two superiors – my boss’s bosses, if you’re keeping track – were stereotypical “good old boys,” whom I believe were threatened not only by Kate’s obvious skill and determination, but also by her ability to get people on her team.

Kate called me last night in a panic. Like me, she has a three-year-old and a new baby, a husband who doesn’t earn a whole lot and a big, fat mortgage from the new house they bought a mere six months ago. What Kate and her family did not have, along with more than one in four Americans, is an emergency fund.

Ask any financial planner, including my father, who is a certified public account (CPA) as well as certified financial planner (CFP), and they’ll tell you an emergency fund you should be your top priority: before your retirement account, before your kid’s college fund, before paying down your debt. Before the recession hit, standard advice was to have enough in this account to cover your expenses for between three to six months; nowadays, many financial gurus suggest upping your emergency fund to cover up to a year’s worth of expenses.

When I made the leap from working full-time in an office setting – where I worked under Kate – to working freelance from home, my husband and I sat down to evaluate our emergency fund. We’d always been good about feeding our savings account – we’re money hoarders, you might say – but we wanted to make sure we had it maxed out before I gave my two weeks’ notice.

Here are some of the steps we took to get there:

  1. Determine where “there” is. If you lose a job, or suddenly find yourself among the millions of “underemployed” Americans, you obviously won’t be spending $25 a week on lattes from Starbucks. You’ll probably pare down your expenses to the bare minimum. Take that number and multiply it by six – you need at least that amount in your emergency fund.
  2. Differentiate your emergency fund from your rainy day fund. In my household, we have two separate savings accounts for these two separate purposes. Our emergency fund would go to pay our everyday expenses – things like groceries, gas for the car, our mortgage – should the need arise, whether through a change in employment status or a medical emergency. Our rainy day fund, however, would go to pay unexpected expenses that arise along the way – we’re talking a car that needs a new radiator or a new furnace for our home.
  3. Go ahead and rob Peter to pay Paul – but only until you hit your emergency fund goal. What I mean is, it’s fine to temporarily halt extra payments on the principal of your mortgage, stop funding your children’s college fund or reduce contributions to your 401(k) (one exception: if your employer offers a matching contribution on your 401(k) or Roth, do your best to keep your contribution at your company’s maximum). Once you hit your goal, start putting money back into your other investments.
  4. Avoid splurging on big ticket items while you’re building up your emergency fund. My husband and I did a great job of this, until we were about a month’s worth of money away from our goal. That’s when my husband saw a brand new, 60-inch flat screen 1080p HDTV on “sale” (and I use that word lightly) at a big box retailer. He nearly convinced me to buy it, but we stopped short: it was more important to reach our long term savings goal than it was to buy a TV we didn’t need.

If you don’t have an emergency fund – or have a grossly underfunded one – the time to start feeding the beast is now. Kate thought her job was safe; after all, she’d made it through the recession with her career intact. But if her job loss has taught me anything, it’s that you can’t predict the future… but you can plan for it.

One Response to Feeding Your Emergency Fund

  1. My wife and I have a rainy day fund and an emergency fund. The biggest problem for us was not agreeing on the fund but were the money should come from. She didnt want to stop 401k for a short period or savings for child education. But we realized the benefits of having both savings when her car needed to the shop. Now we have enough and are back on track.

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