Emergency Funds Save The Day

Yesterday I explained it has been two months without a paycheck and this time off from work is an unpaid medical leave.

Expecting the unexpected can and will happen make it easier to plan for difficult times.

What this entails is smart budgeting, living frugally, and aggressively saving until you have a cushion you feel comfortable with. For me, the emergency savings includes three parts:

Income Protection – A saving account or fund (i.e., short-term CDs) that is equal to six months of take-home pay/salary.

Investment Protection – I have a rental unit – a 2bd/2bth condo in Vancouver (WA). I keep in a separate account my renters’ last month’s rent, security deposit and cleaning fee. I also keep in this account funds to cover two or three months of unit expenses (i.e., mortgage, HOA fee, utilities) should the unit be empty without a renter. I also deposit a small amount ($50) into this account every month to build a cushion for future maintenance, HOA assessments, etc.

General Emergency Fund – This is a fund for those small emergencies that come up – like when my cat died and I needed to pay the vet. Or, when my car (a 2003 Jetta) had a little mechanical problem that set me back $1,100. I try to keep this around $5,000.

Currently I have about $5k in my checking (though I just paid some bills, so week’s end, it will be down to about $2K) and I have liquidated my various savings and have $25,000 in my money market account for my living expenses. Then I have my rental investment account. These funds don’t make up my entire net worth, but they represent the cushion I need to see me through the next few months.

Anticipating the unexpected is essential – especially in today’s economy. My personal belief is that we all need to examine our needs versus our wants.

Over the past few years I wanted to drive a BMW… I would have loved (wanted) to live in a trendy loft and travel the world. The reality is, however, I know my body and its limitations. I need financial security and an emergency savings fund more so than fulfillment of momentary wants of immediate gratification.