21 Ways To Save An Emergency Fund

by Scott Falls on May 11, 2011

In the last article we looked at where to save money for an emergency fund. Now that we have a good idea about what to do with money we’ll be saving for an emergency, the next step we should look at is where are going to get this money?

The first thing I want to mention (and it might be obvious), but in order to fully fund your emergency fund (and financial security is REALLY important, believe me) you may have to make a few changes in your current lifestyle. If you really want to achieve a goal (like funding an emergency fund) I think you should go full throttle and knock it out.

Unfortunately, in order to save a year’s worth of expenses in a reasonable amount of time you’re probably going to have live a little smarter and make a few changes.

  1. Do I really need this?
    One of the most powerful things you can ask yourself when it comes to personal finance and savings money is “Do I really need this?”. Before each and every purchase I just ask myself if I really need this item? Is it a want or a need?

    Is this important?

    If you’ve taken the challenge to furiously save an emergency fund then the answer is absolutely, it’s very important. So, we need to differentiate between wants (things we’d like to have) and needs (things we can’t do without.)

    Obviously the big three are needed (food, clothing and shelter) but what kind of clothes and how often you go out to eat is where we need to take a hard look at. I will be going through about 20 areas that you can either increase the money coming in or decrease the money going out.
    Not all of these items will apply to everyone and I’m sure there’s a million more things that you think of (so leave a comment below with your ideas so everyone could benefit from them.)

  2. Get a 2nd job
    This may be one of the least popular ideas on this list, but it’s also a sure-fire way to increase your income. Moonlighting as a pizza delivery man or working weekends at the home depot may not seem like too much fun, but you have to think of the big picture. The end result.

    You’ll find that a fully funded emergency fund and many nights of restful sleep because little “bumps in the road” financial problems won’t effect you the same way is 100% worth the extra effort it took to establish your emergency fund.

  3. Sell crap you don’t need
    Now that we’ve addressed the wants vs. needs on future purchases, let’s go through our stuff and analyze whether we really need all the crap that we have. Let’s put everything we don’t use in a pile and figure out what we can actually sell.

    Ebay it or garage sale, it doesn’t matter just get rid of it and bring in some money. I usually start with Ebay (because I hope it would fetch a little more than a garage sale would) but for anything I can’t sell on Ebay I’d have a garage sale or find someone I know who is having one and sell me crap there. My theory is that if I don’t need something and nobody is using it, selling it will not only get you some cash but will free up some clutter around the house as well.

  4. Insurance
    You may want to get a couple of quotes from different companies. There’s usually a couple hundred dollar differences between companies. (Just make sure you have your policy in front of you while you speak to them to make sure you get the exact same coverage).
    Also, bundling your policies under one company can save you some dough.

  5. Finance charges
    If you use credit cards and run a balance at the end of the month you are probably paying ridiculously high finance charges. This is a savings and investing killer. It’s almost impossible to consistently earn as much on your money as credit cards charge in interest.

    Here’s my simple rule: Pay it off or pay in cash!

  6. Cable and Satellite Television
    Can you cut premium channels, video rentals and on-demand programming from your monthly cable bills? The answer is yes you can.

    Before you go crazy missing you favorite series on a premium channel get quotes from competing cable/satellite companies, maybe you can switch companies and get locked in at a great rate for a couple of years.

  7. Cell Phone
    Cell phone plans are changing all the time. Determine if you are really using all of the minutes that you pay for? Do you need internet and texts? Maybe you do but maybe you can trim your plan to a lower minutes plan and save a few bucks each month.

    If your contract is up maybe you can see how much other company’s plans cost or if you really only have a phone for emergencies look into getting a pre-paid phone so you can eliminate the monthly bill altogether.

  8. Telephone
    Do you need a land line phone? Look at #6 above and see if you can bundle your home phone right in with your cable provider.

  9. Internet Provider
    Look at #6 above and see if you can bundle your internet service right in with your cable provider.

  10. Refinance Your Home
    Some of us own homes. You should take a look at the interest rate you are currently paying because current interest rates are at historic lows. If you find your mortgage interest rate over 1% greater than the current market rates you should look into refinancing your mortgage. (You’ll have to do the math and factor in closing costs, or maybe you could keep the same payment but knock some time off your loan.)

  11. Credit Card Rewards Points
    Now do not even think about this step if you don’t pay off your credit cards in full each month. If you are disciplined enough to pay credit cards in full then you should put everything on a card that offers you at least 1% cash back. I mean everything, cable bills, groceries everything!

    You’ll be surprised how much that cash rewards starts to build.Deposit each check into the bank to help with your emergency fund. It might be small amounts but it’s like free money because you were going to have to pay for those things anyway.

    Just remember my simple rule: Pay it off or pay in cash!

  12. Utility Bills
    Try to minimize utilities, don’t run the water while shaving, take a quick shower, keep lights and electronic turned off when not using them. There may not be too much to cut here but just a couple of things to think about.

  13. Movies (Entertainment)
    If you must go to the movies try a matinee, they usually cost less and are usually not too crowded. Plus bringing snacks from home and avoiding the concession stand will save you big!

  14. Renting Movies
    If you don’t need to see a movie the day it comes out then get a membership to Netflix, it costs less then the price of a movie ticket to rent movies by DVD and streamed directly to your TV. Plus they have like a million selections to choose from (ok, I’m slightly exaggerating here.)

  15. Groceries
    I’m all about the coupons and I love reading the circulars for the sales for the week. Stick to these items and you’ll save a bundle on groceries. Plus buying the store brand can save you a lot, just compare the ingredients to your favorite brand to make sure it’s similar.

  16. Pack your own Lunch
    Now a days a slice of pizza costs $2.50, so eating lunch out can really start adding up. Packing a good quality nutritious meal can usually cost half as much as a meal purchased at a fast food type of place. Plus you’ll be eating a lot healthier.

  17. Eating out
    The same holds true for eating dinner at restaurants. Cutting back on eating out can save you a lot especially since we’ve clipped coupons and shopped for sale items at the grocery store. Plus you can eat a lot healthier.

    I’m not saying never eat out but make it a special night rather than the norm.

  18. Library
    Instead of buying books, magazines, music and even DVD’s, visit your local library and renew your card. The library is a tremendous resource that’s there for the taking. It’s like a Barnes & Noble, Tower Records and a Blockbuster all rolled into one (and it’s all free.)

    I can even reserve and request items online and then I get an email when it arrives.

    The library has come a long way.

  19. Energy Efficient Light Bulbs
    Here’s an idea that I did in my house. You won’t see immediate, huge savings but you will get a little savings each month over time. I wouldn’t get rid of my working regular light bulbs but I’d think about replacing them with energy efficient one’s when they finally do burn out.

  20. Drive a cheaper (fully paid off) car
    Instead of buying a new car (or worse leasing a new car) why not just pay a few bucks for a reliable used car. Granted it probably won’t be a “Chick Magnet” but instead of looks and speed we’re concerned with reliability and gas mileage. This is what Dave Ramsey would call an “Old Beater”.

    If you can drive a car that you paid $1,000 for a couple years, and put a $100/month toward your next car, at the end of 2 years you’d have $2,400 plus the trade-in or sale of your “Old Beater”, now you upgrade to a better car and do it all over again.

    The best this about this plan is you will never have a car payment!

  21. Have your kids go to a State School instead of a private University
    Lastly, I’ll leave you with an idea that should give you long-lasting peace of mind. Instead of worrying about saving up for a private university for your kids, just focus on saving enough for them to go to a State School. If you’ve accomplished this you can consider your job done.

    Then if your child really wants to go to a private school let them worry about the difference (or you can help if you’re financially sound at that point.)

    State schools are really good, and for the money they’re a real bargain.

I’ve jotted down over twenty ways to save money and start building an emergency fund. I can’t explain how incredible it feels not to worry about money, what an incredibly freeing feeling it leads to.

You can live life the way you want to rather then the way you have to.

So in the long term it’s worth sucking it up and cutting costs, taking on extra work and furiously saving until you reach your goal, because having the freedom to take chances, have fun, and not having to worry about money all the time is really the way life is suppose to be lived.

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Where to invest an emergency fund

by Scott Falls on May 2, 2011

Putting money into an emergency fund sounds simple. Actually finding the spare change to save a few bucks each month sound much more challenging. One of the most common questions I’m asked is, “Where do I invest my emergency funds?”

It’s not 100% cut and dry and you’ll have do a little bit of math (like 3rd grade level nothing too bad..) but I’ll illustrate a basic guideline I like to use when “stashing cash”, I mean… saving money in an emergency fund.

First things first, you have to determine how much you’ll need for a year’s worth of expenses. Here is a simple method I use to determine what you would need to cover your expenses for a year. Yes, I said a year, I believe in order to  has full financial peace (to coin a Dave Ramsey phrase) you should have one full year’s worth of expenses in reserve.

After determining what you need to save to fully fund an emergency fund (a year’s expenses – I’m going to use $40,000 in this example.), the next step will be a plan to save that money for maximize returns and eliminate risk.

Let me first start by explaining what an emergency fund is not. Notice I never used the word INVEST, when saving money for emergencies that last think your trying to do is make a lot of money. That doesn’t mean you shouldn’t get any return on your savings but this is not a vehicle where you’ll be investing in stocks or options or stock-based mutual funds.

This is money that you need to be able to rely on being there in the event of an emergency. The last thing we want to do is put any of it at risk. We are not trying to “make money” on our emergency fund savings. We are basically preserving principal and finding rates of returns that hopefully will allow us to keep up with inflation.

So let’s get back to the $40,000 we’ll be using in this example. Suppose you are working the Dave Ramsey Total Money Makeover, id you read my review you’ll know that I recommend saving 3 months expenses first (then go on to retirement, children’s education..etc).

Read My Dave Ramsey Review Here

The first 3 months of our emergency fund will be saved in a regular good old fashion savings account. Even if you get .25% interest.

This first 3 months ($10,000) needs to have 2 things:

  • Absolute Security (FDIC Insured)
  • Complete Liquidity (You need to be able to walk into the bank and withdraw your money immediately and penalty free

Don’t worry about:

  •  Rate of Return (you’re only focus should be liquidity and security)
  •  Locking in anything (we need liquidity)

The next focus will be on trying to gain a little return on the remaining $30,000. Basically we’re trying to keep up with or slightly beat inflation while keeping the investment secure.

For the next 3 months (months 3-6)  We’re going to lock in some savings. So using the same example the next $10,000 we’ll invest in CD’s. These are basically time deposits were we’re penalized if we withdraw month prior to term of the CD.

What I usually recommend is taking the maximum amount of money you can invest in a given month and invest it in a CD. I’ll assume we can save $1,000 per month towards this goal. For the next 10 months invest $1,000 per month in a 3 month CD (if the rate is much better on a 4 or 6 month CD you can use that but don’t go past six months with this $10,000)

As these CDs mature you will consistently roll them over (take the proceeds and invest in another CD) into a six month CD. So you will put 10 monthly contributions of $1,000 in 3 month CDs then starting on the 4th month you’ll have one matures you’ll invest in a six month CD for the next six months. So after you’re done with the 2nd $10,000 you should have a six month CD maturing every month.

Just continue rolling over the full balance of that month’s maturing CD into a new 6 month CD and you should see a nice little increase in your rate of return.

The last six months of your emergency fund should be no different. You can stick to the CD strategy but start looking at the best rates that you can get (up to a years duration). Sometimes banks have a weird higher rate on an 8 month or 14 month CD ( try to stay within a year but if you get a really incredible rate of return you can go as far as 16 months, but no longer than that)

The reason I’m recommending a slightly longer duration than a year is because after we establish our one year emergency fund, we’ll start investing for wealth. The beginning stages of our wealth building will overlap the emergency fund a little, so we can look for better returns.

If a catastrophe struck, it’s not like we can’t get the money if we needed it, we’d just have to forfeit some interest.

The goal with the CD strategy is to invest monthly into CD’s so that every month we have another CD maturing. Then we reinvest that money (including interest earned) into a new CD. Our goal with the emergency fund is to have insurance (FDIC) that our money will be there when we need, returns are secondary (should look for returns to keep up with inflation not create a ton of income, unless you can do that at zero risk)

What if a money market is paying a better rate than CD’s?

As long as it satisfies our emergency fund rules. 100% security, and 100% liquidity for the first three months and then have a portion of our money rolling (into maturity) each money for a little better returns.

If a money market at a bank or credit union is paying a greater rate of return than CD’s are currently paying then, by all means, invest your money there. If it’s FDIC insured (or NCUA for credit unions) and you don’t have any time restrictions, then that sounds like a home run. Just keep your eye on the rates in case they change.

What about investing in a government bond fund in my brokerage account?

While short term government bonds have traditionally been a good place to park cash earmarked for conservative investments, bond funds do not meet our 100% insured investment criteria. You see, as interest rates rise the bond our investment (our principal falls) and conversely as rates fall our principle rise.

The last thing we need to the market to tank, or your company decides to “right-size” your position right out the door thanks to some yutz consultant’s recommendation whose company will get paid twice as much as your salary for the input.

The last thing we need in a situation like this (an emergency) is for the principal of our emergency fund to be at risk. This is why you need to follow the two rules with your emergency fund and you’ll be ok.

  •     Absolute security (FDIC or NCUA Insured)
  •     Liquidity (Need to able to get to your money when you need it)

Follow these steps and you can sleep like a baby knowing that your in a position to weather just about any storm.

~Scott

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