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Why You Need an Emergency Fund and How to Get It

Emergencies are a fact of life. When you’re faced with an expected event—from a broken bone to a job layoff—you can be ready. An emergency fund is a stash of money set aside to cover financial surprises life throws your way—events that can be stressful and costly.

Last year, Mitch and Jenn had a string of bad luck. Mitch broke his leg in a skiing accident, Jenn’s car broke down requiring major repairs and their home’s aged roof decided to fail right in the middle of a major storm.

 

The timing for all of this wasn’t ideal—four weeks before Christmas. The financial and emotional toll of these events continues to be huge, but nothing like it might have been if they hadn’t been diligently building their Contingency Fund, more commonly known as an emergency fund.

An emergency fund creates a safety net for a home and family. This way you are less prone to experience a disaster when an emergency comes your way.

Mitch’s health insurance is covering most of the costs of his surgery and follow-up therapy. Still they’ve had to come up with more than $2,400 to cover his deductible, co-pays, and prescriptions. The car repairs were just shy of $2,700—not surprising given the car’s age and 140,000 miles.

It was the roof that really threw them for a loop. The estimate to repair it—with no assurance that said repairs would last for longer than a few months—was $750, with a new roof coming in at an estimated $12,000.

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How to Save $1,000 Cash Painlessly

The most important thing you can do to make your personal economy strong is to have an umbrella—an emergency fund with enough money in it to pay all of your bills for six months. And it needs to be safe and secure in a bank account. You read that right—half a year’s income! Wait. You can’t even imagine being able to save that much? No worries. The secret to getting there is to start small. Let’s say you make $1,000 your emergency fund goal.

U.S. $100 bills folded and secured with a paper clip

Save 10%

Weekly, or as you get paid, save 10% of your paycheck. Too much? OK, start with 5% or even 1% and build up from there. Just start!

Make it automatic

This is going to be hard, but I know you can do it: Make feeding your emergency fund—whatever the amount—the very first bill you pay, before anything else.

Once you have accumulated $50, go to your bank or credit union and open a savings account. Or open a free savings account at an online bank like Ally.com or Marcus.com (Goldman Sachs).

While you are opening that account, set up an automatic deposit authorization. This will give your bank authorization to automatically transfer the amount you designate from your checking account straight to your emergency fund. Here’s a secret: You won’t miss what you don’t see in the first place. Okay, you’ll miss it for the first few paychecks, but soon you really will not miss it.

Get rid of non-essentials

Give up the little things such as cable TV, eating out, and gym membership and that landline phone you have, but never use. That’s a start, you’ll know instinctively how to add to this list.

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Ask Me Anything: Pay Down Debt or Invest? | Online Dating | Horrible Odor in Leather Couch

I love it when readers ask me questions. And believe me when I tell you the questions pour in and on every topic imaginable—even how to cut the cost of online dating. Today, I pulled the following three letters from the EC mailbag:

multi-ethinic arms outstretched to ask questions.

 

Dear Mary: We are better off than most. We have no credit-card debt, we have several hundred dollars in cash stashed away in a safe in our house and we have about $5,000 in savings. Our 401(k) accounts and Roth IRAs have a total current value of about $50,000. My husband is 41 and I’m 35. We have two kids and college 529 college savings plans for them. Our mortgage is our biggest payment. Should we pay down our mortgage with extra income or put the extra money into our retirement accounts? Peggy

Dear Peggy: Before you’re ready to do either—pay down debt or invest—you need at least enough money in your emergency fund that to keep all the bills paid and food on the table for at least six months without any income. That money should be in a safe place where you could get your hands on it in say 36 to 72 hours, which could be in your home safe, but I’d rather it be in a savings account in a bank or credit union. While your $5,000 in savings is a good start, it’s not nearly enough. I’m thinking more like $30,000. Am I right?

Once your emergency fund is safe and secure, it’s a tossup on whether you should aggressively invest in paying off your mortgage or invest in the market to build wealth for retirement. I’m sure we could find plenty of experts to argue both options.

I would advise you concentrate heavily on paying off your mortgage debt. There is no better investment than a repaid debt. Not only will you get a guaranteed rate of return, eventually you will pay it off completely. That house will be all yours. You can live in it mortgage-free, while that asset grow in value. As investments go, that’s hard to beat.

MORE: Invest in Your Debt—It’s a Sure Thing with a Solid Return

Dear Mary: I work hard every day and don’t have the energy to get out in the evenings. I spend my free time with longtime friends, so I don’t meet single men. I know several people who have found partners online. I’m determined to find a man for myself before the end of the year. Online dating services may be the way, but they can get pricey. Are there coupons online for special deals? Belinda

Dear Belinda: There are. Google “Online Dating Coupons” and you’ll turn up a love boat load of online coupon codes for any number of dating sites. Please do not take this as any kind of an endorsement from me. Be careful out there, hear?

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Here’s a Foolproof Plan for Saving $10,000

The most important thing you can do to make your personal economy strong is to have an umbrella—a Contingency Fund with at least enough money to pay all of your bills for three to six months without a paycheck. Call it $10,000.

100-bills

SAVE 10% OF YOUR PAYCHECK. It may sound like a lot, so if you can’t do 10, start with 5% or even 1% percent and build up. Deposit the money automatically into your Contingency Fund; you won’t miss what you don’t see in the first place. Okay, you’ll miss it for the first few weeks, but soon you really will not miss it.

GET RID OF NON ESSENTIALS. Give up the little things, such as cable TV, eating out, gym membership and entertainment.

CUT VARIABLE EXPENSES. You can’t cut off your utilities, stop eating or give up driving. But you can reduce the cost of the food, energy and fuel you buy. Opt for the cheapest supermarket and gas station. Turn out the lights; run only full appliances.

QUIT SMOKING. This suggestion requires no explanation. Although it does beg the question, who can even afford to smoke these days? At about $7 for a pack of smokes (U.S. average) that’s a $2,555-a-year habit. And in New York City it’s double that. Yeah, $14 a pack.

STOP PAYING BANK FEES.  If you’re paying a $7.95 (or higher) per month fee for the privilege of maintaining an account, stop! Open an account at an online bank (they pay better interest rates anyway), like Ally Bank, that doesn’t charge a monthly maintenance fee for checking or savings accounts. Or check with a local credit union for free personal checking accounts. Some banks even offer free business accounts.

PULL BACK.  Stop sending more money than required each month to your credit card companies, mortgage lender or any other creditor. It’s admirable that you’re being diligent in repaying the debts, but if you continue to do this while living without money in the bank, you’ll be setting yourself up to fall even deeper in debt.

CLEAN OUT. Take a look through your cupboards and closets. Identify everything you haven’t used in the past six months. Turn what you don’t need into cash on a website like eBay or Craigslist or hold a yard sale.

ADJUST WITHHOLDINGS. Use the 2019 Federal Withholding Tax Calculator to make sure you aren’t having too much or too little income tax withheld from your pay.

INCREASE YOUR INCOME. Get a second job. Or third. Work more hours at your current one. Get creative by making money doing things you already love to do, like dog walking or selling handmade items.

GIVE UP YOUR LANDLINE.  About 45 percent of American adults still pay for a landline phone service. Are you in that group? Basic service costs at least $25 per month in most markets.

TAKE YOUR LUNCH TO WORK. Have you figured out what you’re spending per year on eating lunch out? At $10 a day, you’re spending $2,500 after-tax dollars on lunch. Just think of all the dinner leftovers you throw out that could easily be tomorrow’s lunch.

STOP AT THE MATCH. If you are contributing to a retirement account like a 401(k) or 403(b), don’t stop now, but limit your contribution to the amount your employer matches. Ask your employer how to adjust your contribution. Once you have save to your goal, you can always change your contribution again.