Wednesday, July 30, 2008

Back up your life with an emergency fund

Life is good.

Maybe you just used the bulk of your savings to buy that cute Audi you've been eying for, oh, the last four years. Or maybe you scrimped, scrounged and recently bought your very own home. But just as you walk over the threshold of your new abode, potted plant (the first of many!) proudly in hand to adorn the all-but-empty living room until your furniture arrives, you get a call from your job, where you're on the verge of a raise -- or so you think. *Poof!* Visions of corner offices and corporate golf games suddenly dissipate with Human Resources on the other end of the line, informing you that, unfortunately, layoffs are in full effect and you won't be needed on Monday ... or ever. Your bottom lip starts to quiver at the frightful thought of the giant mortgage you'll now have to pay off sans current job, along with that overpriced potted plant you just charged.

Hey, it happens.

But before you cry into your Ben and Jerry's and lose yourself in a Mad Men marathon (confession: I'm currently obsessed with the show), sit back and analyze your options. You may have been setting aside bits of your paychecks in a 401(k), but did you also sow the seeds of an emergency fund? If not, chickadee, we need to talk.

An emergency fund should be one of the essential backbones of your life. Seriously. Although it may not always be thought of in the grand scheme of your fabulous future, what with all the chatter of "buying a new home" and "setting aside for early retirement," it's still imperative. Unlike saving in an IRA or mutual funds that you don't intend to cash out till it's time move in with a Dorothy, Blanche, Sophia and Rose of your own, emergency funds prepare you for the present.

And ladies, we watch enough Lifetime (did I just admit that out loud?) to know that the present can hold many surprises. Lost jobs, expensive accidents, divorces -- these kinds of unexpected scenarios can happen at a moment's notice. Would you have enough money right now to pay the rent for a few months while you're between jobs? Are you prepared right now to cough up the cash for a new transmission if your car breaks down? If the thought of these ulcer-inducing scenarios makes you break out into a cold sweat, don't freak out! Just ask yourself one question...

How much do you currently have saved up in an account that you can access at a moment's notice? Sorry, money tied up in stocks or other investments take a few days to clear when transferring accounts, so those don't count for abrupt situations. If you lost everything you had tomorrow, would you be prepared?

If you answered with a sheepish "No ...," don't fret. There are many out there in the same predicament, but all it takes is time and patience to build some solid financial back up. Some marvelous pointers to remember when sculpting your opus of an emergency fund are:
  • In the end, you should have six months worth of your income saved up. Some people think three months, but I say it never hurts to be more prepared. Especially if you don't want to cut back on whatever lifestyle you're leading now. The six month rule is especially crucial if you have kids or other family members that are dependent on your salary.
  • Lock the door and throw away the key. I know you've heard it all before, but your emergency fund should be treated as if it doesn't exist. Don't ever, ever dip into it, unless of course it's for an emergency. Examples that don't fall into the emergency category are new shoes, clothes or front row tickets to see Madonna. You get the picture. I know that in the heat of the moment, those luxurious Michael Kors boots may have "emergency" written all over them, but if you don't have the money in your checking account to buy them, those boots are unfortunately not made for walking.
  • Keep this account separate from all other accounts. Check to see what kind of account is the best for your cash. It may be a savings account, CD or short-term bond, which are all accessible at a moment's notice and considered liquid investments. Just remember that whatever you end up choosing should have no monthly fees, and be returning 4% annually on your money.
  • Set up automatic deposits into your emergency fund. By not doing this you may A.) Forget to make timely deposits, or B.) Conveniently "need" your entire paycheck for other "necessities," such as a bevy of manicures, spontaneous road trips, or that new Dior makeup line you noticed at Saks.
Instead of relying on an emergency fund, many people make the mistake of falling back on credit cards to save the day when disaster strikes and a heating or cell phone bill needs to be paid. But falling back on credit instead of stashed cash puts you at risk of falling even deeper into debt because of burgeoning interest, which can make it harder to pay back in total. Plus, as I've mentioned before, do you really want to spend more on your groceries, rent or even toothpaste in the long run (what with the interest payment tacked onto the price tags), just because you didn't plan in advance?

Didn't think so. And if try as you might, saving just isn't your thing (Brunette on a Budget gawks at her desk at the idea), at the very least create an emergency fund for yourself, before you even think about IRAs or 401(k)s. The latter may be imperative to fund your lavish lifestyle of European villas and the occasional trip to the Cape in retirement, but that's all in the future. Take proactive steps to fund your present!

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