11 Ways to Spice Up Your Emergency Fund
Published on - September 17th, 2009 (Modified on - December 18th, 2009) (by Adam Baker) This article is by Adam Baker, a GRS Staff Writer. In addition to writing for Get Rich Slowly, Baker blogs over at Man Vs. Debt, where he discusses ways to simplify your financial life.
A thriving emergency fund is an essential piece of a healthy financial picture.
You’ve heard this a million times before. The basics of emergency funds have been covered in depth. We’re used to hearing discussions on why they’re important and how large they should be.
But do you know what we don’t hear much about? How freakin’ boring they are!
Let’s be honest: There’s nothing sexy about building an emergency fund. Sure, it’s possible to get fired up for the initial push. You can take advantage of small, specific tips to create an early spark. But what about going from $1000 in savings to six months of expenses? Eventually the excitement fades.
Testing a fresh approach can change everything. Sometimes all it takes is a minor shift in mindset. Whether you’re just getting started or need a push towards the next major benchmark, here are eleven tips to help spice up your saving:
- Treat your emergency fund as self-insurance. An emergency fund is just another way to spread risk. You’re spreading the risk that something unexpected pops up and wrecks your budget or causes you to fall into a cycle of borrowing. All too often, though, we’re worried about chasing 0.5% interest-rate increases or the lure of tying up our money in a bigger, better deal. Stop fretting. Find a high quality high yield savings account with a decent return and plant your money there. It’s not part of your investment portfolio — it’s part of a diverse insurance plan.
- Narrow your definition of an “emergency.” Having savings in the bank can cause us to justify some unusual behavior. Suddenly, every unplanned expense becomes an emergency. How can anyone be expected to build a robust emergency fund when they’re tapping into it every other month? Fight back by clearly defining what you will consider an emergency upfront. You’ll be shocked how fast your fund will prosper when you don’t constantly use it as a crutch.
- Over-budget for miscellaneous expenses. So how do you deal with those unplanned expenses that aren’t valid emergencies? Expect the unexpected. Aim high on your miscellaneous budgeting category. You’ll break your budget less often and avoid the habit of reaching for your emergency fund. When these expenses do come up, take note, and add them into your budget. Eventually you’ll develop the ability to project nearly all non-emergency expenses ahead of time.
- Live a pay raise behind. The next time you get a promotion, don’t fall victim to lifestyle inflation. Take the increase in monthly income and set up an automatic transfer to your emergency fund. When applied to retirement, this technique is often referred to as “pay yourself first.” As long as you can continue to live within your means, it works like magic. Looking for a place to start? Scale back one pay raise. Budget using your old income and start transferring the extra today!
- Round up your budgeting categories. The simpler you make the budgeting process, the more likely you are to stick to it. One way Courtney and I have been able to simplify is by rounding our categories and expenses to convenient whole numbers. If your debt payment is $82.31 per month, budget $85. If your mortgage is $1368 per month, budget $1400. Not only will budgeting seem easier, but at the end of the month you’ll have a buffer in your account which you can sweep into your emergency fund.
- “Snowflake” your unplanned income. The term snowflaking is a nickname given to the process of applying any amount of extra money (no matter how small) to your debt with the lowest balance. It’s a neat concept that can help quickly build momentum. There’s no reason this should be limited to paying off debt. Anytime you bump into a small windfall, immediately apply it to your emergency fund. Attack it with passion!
- “Re-fund” your savings. You know what the perfect amount is for your first emergency fund is? Whatever the amount of your tax refund check! In a perfect world, we wouldn’t be loaning the government our money for the better part of a year – we’d be earning interest with savings accounts and certificates of deposits. But the truth is millions do. If you’re one of them this year, take the money and jump-start your emergency fund.
- Save up for the knock-out punch. This technique starts with selecting a base level for your fund. Next, rather than paying extra on your debt or towards a savings goal, pour every extra penny into your emergency fund. Once the fund grows large enough to accomplish the goal and still leave you with the base amount…go for the knock-out. Pay off the debt, book your plane tickets, select a new goal and start the process over. If a true emergency does strike you, chances are you’ll have a little extra buffer.
- Focus! Having serious trouble? Make your emergency fund your absolute number-one priority. Channel all of your energy. Pay the minimums on debt. Put your other savings goals on hiatus. (Some respected advisers even suggest halting your retirement savings for a short time!) Only you know for sure what level of intensity is right for you; however there’s a lot to be said for the power of concentrated focus. Put your head down, knock it out, and move on to your other more sexy goals.
- Negotiate a “big win.” A broad tip, right? Here’s the point: Use your emergency fund as an excuse to tackle a high-impact project. Need $1000 to get started? Go for it all at once. Ask for a raise, sell one of your cars, or refinance your mortgage. Look at your largest monthly expenses and ask yourself if there is a way you can make a huge impact quickly. Use these opportunities to get comfortable with the basics of negotiation. It’s a skill that’ll pay dividends the rest of your life.
- Sell your crap. Kill two birds with one stone. Have an emergency-fund dedicated spring-cleaning session. My suggestion is to create a list of everything you own. Every single item. Go room by room. Nothing has made me want to purge my stuff more than this process. Afterward, set a deadline to sell half of the items on the list. Get passionate and declare war on your stuff. Not only will you feel refreshed, but your emergency fund will be more healthy than ever.
What other ways have you found to spice up your emergency fund? How did you get started? Did you switch it up to maintain motivation? Share your personal experiences below!
Photo by Adam Baker — but not the same Adam Baker who wrote the article! It’s all very confusing.
This article is about Basics, Hints and Tips, Money Hacks, Savings
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I love the “sell your crap” tip. After college I was strapped and sold a bunch of my junk and got quite a bit for it. Not only that, it de-cluttered quite a bit and helped me realize that junk is expensive, takes up space and, in a few years, means so little to you that it’ll get tossed away. I’ve bought a lot less because of that realization.
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Adam–great post. I have had money issues or lack of all my life…I have been reading different financial websites that all recommend the EF, and I think it is really good advice. Just knowing as you make your EF larger that you can now make choices and not be forced into bad money decisions is well worth it!
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Well, it’s true that emergency funds are boring… but you know what’s *really* exciting?
That’s right– an emergency!!!!
Kidding aside, emergencies are obviously not the kind of excitement you want in your life. I try to remind myself that many emergencies can be mitigated (at least from a monetary standpoint) by having the e-fund, and that keeps me going.
Hurray for boring!
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@Alexandra #1 – I agree with you, and I think the reason some people do not, is because they do not trust themselves with the credit. The excuses about companies cancelling unused accounts is just that – an excuse. IF you are disciplined, you can still keep one open by putting minimal charges on it, eg monthly bills etc.
When I was paying off my $50k of debt (in order of interest rate, because it made more sense) I was closing the accounts as I finished them. But I kept one open, made it joint with my partner and we used it for the monthly expenses such as groceries. The limit was far higher than we needed, so if an emergency came along I put it on there. So what if it meant increasing my debt? In the meantime all my money was paying off 14%+ interest rates — and it turned out we never even had an emergency.
But the key is, I am an excellent budgetter (once my period of debt-gaining madness ended), and very disciplined with spending. If other people aren’t, then they can’t trust themselves. A hot date would be an emergency and the clothes would end up on the credit card!
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Kat @40 – Actually, someone who is paying off their debt at the minimum payment or above is not likely to default and therefore someone the banks want to keep. I suppose it might depend on how bad your credit rating was, but generally not. The problem is removed by keeping a card which is used every month but paid off in full, although the banks refer to us customers who do that as ‘freeloaders’.
April @47 – well then I hope you don’t have an emergency in October or December or February before you get your $2000 back. Especially if you’re using it as a way to jumpstart an EF, and therefore don’t have much of one set up yet!
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Thank you for this post. My emergency fund is almost at the level where I’ll feel comfortable but that last stretch is torture! Feels like it’s taking forever. I just need to calm down and stay patient. Your suggestions are perfect… sweep my extra cash at the end of the month … maybe sell a couple of things … and deposit money from any side jobs. Eventually it will happen … and when it does, I can look forward to saving for other (less boring) opportunities!
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Congrats to all of you – what a lively set of comments – GRS – kudos.
One point – While I call this sum of money an EF – I think it is a misnomer. Over time (several years a long time ago) I managed to go from no EF to a six month EF. The goal is to have enough on hand if their was a financial drought for six months, then I could live in the style that I am acustomed to. Now if the drought was ‘real’ I’d live much for frugally. Emergency – doesn’t exit – having a budget (since I was in college) has made me an expert. Here’s one way to boost your EF – the deductible for my auto policy is $500 annually – I save $42 / month. If I don’t use the deductible – then I designate it to the EF or to the Major Repairs Auto line in the budget.
Taking the pennies, nickles … up to the dollars, is a great way to inch the EF up there. I applaud all your readers…. keep on striving. If the last push seems tough, adjust your goal upward and onward.
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@April – the other problem with your suggestion is that it’s not a true emergency Fund. What happens if you start withholding more money in May and you have a $2000 medical bill in October. You have to wait until Jan/Feb at the minimum to get your money back from the government. If you had been putting that extra money in a savings account instead you’d be able to put it right towards your emergency.
Edit: totally didn’t see Nicky’s response @ 55. Whoops.
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Wow, lots of opposition to an emergency fund! $1000 as a starter emergency fund is next to nothing. If you don’t have this cushion in your checking account at a minimum you’re really taking a gamble. You’re one paycheck or payment cycle away from an over draft.
I live in a country where cash in king and some things you can’t use a credit card for everything (like my recent $300 car inspection/repair).
If you managed to get into $10,000+ consumer debt, “the math doesn’t work” argument doesn’t hold much weight. Emotions play a role too or you wouldn’t have accumulated debt.
You’re saving $100-$300 a year by living on the absolute edge. But if you want to try something else, all the power to you.
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Good tips! Health disasters are one of the biggest causes for bankruptcy. Make sure your health insurance is in full effect!
For the EF, it’s all about “Going Broke To Win Big!”
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to those who are arguing that an EF doesn’t make sense, remember that we all have our own specific situations to deal with and have to make our goals and plan accordingly. Being able to remove emotions from the equation is impossible with money, what are we, robots? We can’t just put money X in account Y and not think about the sacrifices, the successes, the losses, whatever that money and the way we’re using it means to us.
Many of us have so much debt that it won’t be paid off for years and years. Should I just have a credit card because ‘the chances I’ll have an emergency are low’? No way. That’s like not having health insurance because ‘hey, I’m young, cancer and car accidents happen to other people. Logically, it’s unlikely to happen to me.’
I’ve got $175,000 in student loan debt and a $15,000 emergency fund that would cover 6 months of expenses for my husband and I. So would I feel better if I had just put my half of the EF into my loans and right now had more like $168,000? That is just a number, even though logically it might turn out well for me in the long run to have done it that way, it wouldn’t make me feel good right now, in the midst of an emergency.
I was the victim of a theft last week in which all of my valuable electronics were stolen including my laptop which I use for work. Because of my EF, I was able to go right out and buy a new laptop, and not cry myself to sleep because I was broke because of some stupid drug addict who broke into my car. As I am on vacation, I am able to go right back out and buy a nice digital camera again to take photos of this amazing place. This experience would have turned my stomach if I had to put everything on credit. My choices would be either live without all my stuff until I could save up enough to buy it (would take months) – I could do that, but it would suck – or put stuff on a credit card and feel horribly guilty rather than feeling proud that I was prepared for an emergency. Even if I could argue to myself that “the extra payments on my loan have saved me money that might equal out to the extra payments I’m making on a credit card”, that rings rather hollow when my debt looks endless anyway and the emergency is making my life miserable at this moment. If my loss had been something even more crucial – like my house burning down or car being stolen or getting run over while crossing the street – I’d be even more psyched not to have to use credit while waiting for some convoluted insurance claims process that probably won’t pay me half of what I lost was worth.
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Nicky at #54 seems to think that my arguments in favor of an emergency fund are based in a lack of trust in my discipline and excuses about the instability of credit cards (I’m taking his general comments and making them personal because I’m definitely one of the people at whom he was aiming). Well, he’s wrong. Agree with my arguments or don’t, but don’t try to undermine them by speculating about my motives when you don’t even know me.
For what it’s worth, I’ve never had a problem with debt and I trust myself to handle credit. The first and only time in my life that I couldn’t pay off my entire credit card balance and had a hard time paying my student loan, I got a second job and within two months had started a new career so that I wouldn’t be in that situation again. I currently have sufficient available credit to buy a condo so I know I can trust myself with the cards.
My thoughts on the subject of emergency funds come from working in finance for the last 20-odd years, from reading about what has worked for others and seeing what has worked for family members, from reading stories this past year about people whose credit cards were being cancelled, and from the value I place on self-reliance.
So those are my credentials. If my arguments are persuasive then I’m glad my experience is useful to you, and if not just keep living your life the way you see fit and I wish you the best.
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One trick I use, is that I often have to use cash to pay for soemething during work travel…and that money is reimbursed a month or two later by my office. I always take that reimbursement and put it in my savings, as it feels like it has already been spent.
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One way we could all make our emergency fund more “exciting” would be to take a good hard look at our hobbies: Is there any way you can make cash on the side with one of your hobbies?
I know someone who started with one Minnesota Viking’s football collectible, and has traded up and now has a collection worth something like 50k. Talk about an emergency fund! And he never brought in more money. Instead he bought things and sold them for more. Plus he had a heck of a lot of fun doing it!
Can your hobby make you extra money for your emergency fund, on the side??
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My EF is geared towards my spending psychology. Not lack of trust of myself, just encouraging my motivation. You know some folks lose weight by looking at a pic of a skinny supermodel for inspiration, others might lose weight by looking at an overweight relative they don’t want to turn into. Whatever motivates you.
For me, the $2K in savings is HARD to spend (which is good!). It’s cash, in my account, the green line on my spreadsheet. Credit is nothing much to me – an invisible nothing that turns into a red line on my spreadsheet when I use it. I feel satisfied when I look at the green savings line, so that’s my motivation for keeping it there. I never got in trouble using credit cards anyway, so I trust myself completely. I simply don’t like to use them.
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I need to get to work on an emergency fund. Hopefully I’ll never need it, but I’m sure someday I will.
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@ Nicky 55 and @ 58 Ken
To each their own. I’m curious if you all have actually tried the method I am suggesting or not. This is a possible method for people who like to see a big check go into their EF at once, and whom may normally have a hard time saving the $5 here and the $25 there. Also if a real emergency did occur you always have the option of changing how much you claim, letting you rebuild your fund for a brief amount of time with money that you are not used to having and have not included in your normal budget. This method could be considered for someone who only has $500 to $1000 in the EF fund and is trying to work up to a 3 months supply. There should still be monthly contributions to the fund but for someone just getting started on their EF it can be a real moral boost. There is the potential emergency during the first year but then like Alexandra said that is what credit cards are for (I personally prefer to just have a large EF but to each their own).
To put it in a different light, people tend to think more about how they spend large chunks of money. That’s why people carry $100 bills and try not to spend them, or why the government decided not to send out stimulus checks this year but rather suspend $10 worth of taxes per paycheck for a few months. This boils down to mind games, but the truth is that most people are more likely to apply that $2000 tax rebate check all at once to debt or savings than they are going to try to apply the extra few dollars each month to debt.
I know the argument against this method of saving. However not everyone saves the same way, some of us require a bit more spice and a planned windfall complements of the government once a year can provide more mental relief/excitement than getting an extra hundred dollars every month.
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I know someone that instead of thinking about having a 3-6 month EF and the overwhelming task of building the account up to $10,000 or so, would think in terms of specific bills instead. First she saved enough to cover 3 mortgage payments. Then she saved enough to cover 3 electric bills, then 3 car payments, then 3 phone bills, and so on. It broke down the large EF into smaller, mentally more attainable goals to work towards. I thought it was a great idea.
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May I suggest changing the colloquialism in tip #11 from “kill two birds with one stone” to “feed two birds with one seed.”
From your “friends” at the National Audubon Society.
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Great post.
(I also like Bill’s suggestion at Post #69.)
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I also have found it helps to set interim goals. My first was 1 month’s mortgage payments. Now its 2-I currently have 1.5 months. My goal is 9-12-tough call-but you do it a month at a time. I graph my progress and check regularly.
I am also saving towards having income to pay bills and currently have some $$ outside my retirement accounts generating an 8% dividend. I just received the last check of a bonus-it is all going in-it will double the balance, double the dividend, and generate enough income to pay my power or car insurance bill. As I am not retired, I am reinvesting the dividends and will continue to build the balance. My goal is to cover all my monthly bills with this account but Im building it 1 small piece at a time.
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This is great advice. A strong emergency fund gives not only gives you a sense of security but peace of mind as well. Personally, I believe in paying off all debt before starting an emergency fund. I don’t see the point of saving money at a low interest rate while paying debt at a high rate.
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It is hard to make good financial decisions with out some piece of mind that comes from an emergency fund.
Emergency funds aren’t sexy … but they help me sleep at night.
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I save all my change and deposit it into savings (presently my EF) whenever I go to the bank. My bank has its own coin counting machine so I just keep a pouch in the car that all my change goes into and take that in with me. I dump it into the machine, get my little receipt and have the nice teller put it into my account, all in one quick visit.
I also make a habit of not paying exact amounts. If the item is $1.07 then I get $.93 back which goes straight into my pouch. You’d be amazed at how fast it adds up!
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This is a good post… especially #2 and #4.
And of course to take your #4 point to the next level, if people (especially coming out of college) would maintain their current lifestyle after they land that BIG JOB, they could put enough money away after a few years to be filthy rich at retirement age. But that is a different story.
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Narrow your definition of an “emergency.” is the best one. You should have other savings account to cover other unexpected expenses. I have: car, home, medical, general, vacation & other savings accounts that are solely to save up for both expected and unexpected expenses in those categories. My emergency fund is just for that Emegencies, not things I didn’t have the foresight to expect, like a care breaking down. I know that will happen eventually so I save for those as well.
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Instead of going all or nothing with eFund or debt or whatever, I broke stocking my eFund into different stages. Each stage is a different goal which I then add to my priority list like I would any other goal. Not having $1k in savings is a huge risk, so it has a higher priority. Likewise, that last $1k provides much less risk protection, which explains why the end is harder. I think it makes the most sense to put your money towards whatever mitigates the most risk at the time. For instance, perhaps someone would save a $1k eFund, pay off their credit cards, stock their eFund to 3 months, pay off their car loans, stock their eFund to 6 months, etc. It makes more sense to look at all of the ways you can reduce risk and choose the most effective rather than just picking one and sticking with it.
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