differing opinions

c/o we heart it
so this whole emergency fund thing has had me up in arms over the past couple of weeks. the problem here, are all the differing opinions on the topic.
do you need an emergency fund? how much do you need? is 3 months okay? should you have 6?
how do you figure it? what do you use it for? should you have a fund for emergencies when you are in debt or broke?

you could read a million opinions on the topic-which makes it tough for someone like me, who is still navigating through all of this financial information. i like cut and dry. black and white. easy peasy.

but with something like emergency funds, i'm going to have to make my own final decision on this one.

of the information i found the consensus (for the most part) is this:
~3-6 months is a rational amount of money to have stocked away
~your emergency fund should be a liquid asset-kept somewhere that is fairly easy to access should an emergency arise
~emergency funds should be used for just that, emergencies-you lose your job, break your leg, blow your transmission. they should not be used for hefty expenses that you just didn't plan for-if you know it's coming-you should be planning accordingly, not waiting to drain your emergency fund
~once tapped you should begin immediately pumping money back into your fund
~the more your monthly expenses, the more you should keep put away
~home ownership, pets, and kids should all increase the amount you have
~you can adjust your emergency fund amount down if you have an additional family income (so basically if you are married you can have less-likely you both won't lose your jobs at the same time), you have investment income, or a side job
~you can also lower your emergency fund amount if you have substantial liquid assets (or assets that can be converted to cash quickly if needed)

figuring how much is right for you:

first: write down your minimum monthly bills-these are the things you are contractually obligated to pay-rent, car payment, student loan (although you could request a default should you lose your job). things that could be canceled (cable, gym memberships, etc) shouldn't be counted here-should something catastrophic happen, you could always cancel these things.

next: list all the routine monthly expenses that you have-gas, groceries, etc. be tight on these-you likely won't be driving cross country for fun, or eating steak if something should happen that required you to dip into (or deplete) your emergency fund-so think of bus fair and romen noodles.

3 months is generally the minimum amount of months it takes to find a new job-so if you have any possibility of doing a job search 3-6 is likely right for you.

if you have fairly liquid assets like i talked about above-or if you are in a secure job in a growing industry you may not need all 3 months.

my decision:

my total monthly expenses (both routine and contractual) add up to about $1700.00.
i have a secure job, and a few fairly liquid assets.
my savings account earns interest at 0.10%, and my student loan interest rate is 6.55%
so, i've decided to pull a bit of my $5,000 (current emergency fund) out and put it down on my debt.
i'm leaving $3400.00 in the emergency fund/savings-and putting the rest on my loan.
then, starting july1 i will transfer approximately $175.00 back into the savings account each month.

i'll have a decent payment for my loans while still keeping a good chunk of change in savings. i think i'm doing the right thing for me. my mom would probably freak out to know i pulled savings money-but luckily she's not big on blogging.

kinda feels like gambling....
xoxo ashleycolean


ABarr said...

Okay, so but back to the question we discussed last week. If you only have enough extra cash to put towards one thing, what should be your first priority? Getting the emergency fund set or debt??

ashleycolean said...

it all depends on what your debt looks like, your comfort level with the unknown, the risk you're willing to take, your employment security and your priorities.
which is the problem...every person is different. we all have our own 'financial fingerprint,' if you will.
had i not had any money in savings i would have likely tried getting a small cushion there first before snowballing my debt. but, i'm not a risk taker-especially with money. i like to be safe-just in case.
if your debts have high interest rates (above 6%) you should work on paying those down first. if your debts have low (or no) interest you may want to consider beefing up the emergency fund first.
hopefully you can make it work to do both-pay the majority on your debt while still contributing (even in a small way) to an emergency fund. let's say in a month, once you pay all your contractual and variable bills, you have $300 left. my suggestion would be to put $240 down on debt and $60 into your emergency fund. this $2/day won't feel like a hit to your funds but by the end of the year will be $720! just remember with something like an emergency fund-EVERY LITTLE BIT HELPS!..