The polls that appear in the Get Rich Slowly sidebar are far from scientific, and a lot of the time they don't yield anything interesting. But sometimes they turn out a curious piece of information.
At the end of April, the poll question asked, “How many months to do you have in your emergency fund?” This was the same question posed in mid-January. This poll also ran concurrently at Money Rates, a site with a much older readership than GRS. And what were the results? Let's take a look. Here's what you said in April:
|How many months do you have in your emergency fund? (May 3rd)|
|less than 3 months||38%||12%|
|more than 12 months||14%||36%|
|what's an emergency fund?||9%||12%|
|1724 total responses|
And here's what you said in January:
|How many months do you have in your emergency fund? (Jan. 28th)|
|less than 3 months||2%||3%|
|more than 12 months||23%||19%|
|what's an emergency fund?||13%||24%|
|1270 total responses|
Now, I realize a poll like this isn't scientific, and it's difficult to draw any actual conclusions, but wow. Even without tight controls, it seems pretty clear that readers at both sites (but especially here) have seen their emergency fund dwindle over the past few months. (Actually, the older folks at Money Rates are divided; some of them have built savings recently.)
I know my own emergency fund suffered a setback recently. As I wrote last month, our sewer line needed some work. Taking your advice, we had multiple plumbers bid on a fix. They actually came in around the same price ($2500), so we went with the outfit we've been using to deal with our plumbing emergencies. To pay for the work, I tapped my emergency fund.
In the olden days (2007, for example), this would have caused me great stress. I didn't have much in savings. In fact, I had less than $1,000. But since paying off my debt, I've been able to pad my emergency fund to over $10,000 — plus I have a whole bunch saved in other targeted accounts. Sure, this money is set aside for a trip to Europe and for an eventual new car, but if I needed to, I could use it to cope with a crisis.
Maybe it's time to review some emergency-fund basics. If you're new to the concept, follow these guidelines when setting up your rainy-day fund:
- Pick a bank. I'm a fan of local credit unions and community banks, but I also like high-yield savings accounts at online banks. (My emergency fund is at ING Direct, though there are plenty of other options.) It doesn't matter where you save; the important thing is that you do save.
- Build a buffer. If you're still in debt, it's probably best not to stick a lot in savings. You should set aside $500 or $1000 to deal with annoying emergencies like a car that breaks down, but the rest of your money should be thrown at your debt.
- Resist temptation. When you have a big chunk of change sitting in the bank unused, it can be tempting to use it for other things. Maybe you want a new television to watch the World Cup. Or maybe you want to purchase a new grill for barbeque season. Don't. Resist the urge. Use your emergency fund only for emergencies, otherwise you defeat the purpose.
- Save more. As your debt dwindles, and as you get better control of your finances, build your emergency fund. Many financial gurus recommend hoarding six months (or more) of expenses. I'm not sure there's any one set figure that works best. Instead, I recommend picking a number that helps you sleep at night. For me, that number is $10,000. That seems like a lot of money to me, and if anything disastrous happened, it would help me and Kris survive for a long time.
And, of course, don't forget to save for your other goals. Your emergency fund is important, but you also need to set money aside to pursue other dreams, such as your daughter's wedding, that trip to Japan, or the boat you've always wanted. (As I've mentioned many times, I'm a fan of targeted savings accounts for this kind of planning.)
Having said all that, I'm dying to know: How much do you have set aside for emergencies? Has your rainy-day fund dwindled over the past year? Is it because of the economy? Do you feel scared because your savings is starting to shrink? How important to you is saving for an uncertain future?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.