Money for the Rest of Us

I pay for renter’s insurance so that if some unexpected tragedy were to happen and all of my belongings were ruined/destroyed/stolen my life would not be turned completely on end. Every month I pay for car insurance so that if some unfortunate accident were to occur, my life and the life/lives of others involved wouldn’t be financially ruined. Almost everyone pays a good deal of money each month to keep themselves safe from an unexpected event- a fire, flood, earthquake, or car accident. So, why don’t we pay money each month for “unemployment insurance.” Well, we do. In our taxes. But, would government unemployment benefits actually allow you to continue your lifestyle as it currently is? I am almost certain that the answer is no. And the government won’t come to your aid in other crises.

So how to you get “unemployment/emergency insurance”? You create it yourself. And you certainly should. It will be one of the best investments you will ever make. If you don’t already have an emergency fund, start one. First, open up a high-interest savings account such as one at ING, HSBC, or Emigrant. (It really doesn’t matter which one. I chose HSBC because they have a branch office in my city so that if I actually ever needed the money I could withdraw from an ATM that day and not have to wait 3 days for on online transfer.) After you have your high-interest back account, arrange automatic withdrawals for your new “insurance.”

Finally, the most important step in starting your emergency fund is understanding that this is a monthly payment you have to make, just like any of your other bills. By thinking about your emergency fund as insurance you will soon forget that you ever had that money to spend. It is scary, but incredibly likely that someday you will have an event which will require you to dip into this fund. You could lose your job, but a more likely scenario is that your car needs a repair or you have a large medical bill or you accidentally broke your friend’s camera. By having this emergency insurance you will be able to fix your car, pay the medical bill, or buy a new camera without having to go into debt.

Some common questions about emergency funds:

1. How much should I save?

This is something you should decide for yourself. A few things to take into consider: How much is your rent/mortgage each month? What are your minimum total expenses for each month? What is the deductible on your car/house/renter’s insurance? Some recommend that you have anywhere from 3 to 12 months worth of savings available. For unmarried twenty-somethings I think savings that will cover two to three months of your expenses is enough.

2. How do I calculate that?

If you are currently living paycheck to paycheck the easiest thing to do is multiple your monthly take home pay by 2-3. For example, if after taxes you earn $2000 each month and you spend it all on things that are absolutely necessary, you should have $6,000 saved. (Chances are you don’t spend all of it on things that are absolutely necessary. Maybe 70% of your take home pay is a better number). In this example seventy-percent of your current take home pay would mean you would need an emergency fund of $2800-$4200. At the very minimum I would recommend doubling your highest deductible. If your car insurance deductible is $500 have $1000 in your emergency fund.

3. OMG, that’s a lot of money! I can’t afford that!
Yes you can. Remember, this is an insurance bill. You have to pay it. Set up automatic deductions for $89 each month. (Why $89? It doesn’t sound like that much money).

4. Where can I learn more about emergency funds?

Here are some good posts on the subject:

Building an Emergency Fund (Bankrate)

How and Why to Start an Emergency Fund (Get Rich Slowly)

Four Steps to an Emergency Fund, and Peace of Mind (The Automatic Millionaire)