Setting Up an Emergency Fund

The emergency fund is a staple of the advice given by the personal finance community.  Suze Orman says that you should save enough to cover eight months of living expenses in your emergency fund.  Dave Ramsey says that you should save at least three months of expenses in an emergency fund if you have a double-income family and as much as six months if you have a single-earning family.

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The sad fact is that many Americans cannot weather even a minor emergency.  CNN reported in May of 2018 that some 40% of American households aren’t ready to handle a $400 emergency.

As a personal injury lawyer, I’ve seen it with my own clients – some of whom cannot afford the additional cost of physical therapy co-pays to the tune of $25/visit three times a week.  That simple additional drag of $325 a month is something that they just can’t keep up with.  They sometimes have to resort to signing away a portion of their claim to loan-sharking lawsuit lending companies.

Your bank account needs to be built to be able to take a punch.  The question is where to store the reserves.

I like to keep mine in separate buckets outside of my regular savings and checking accounts.  Since law school, I have maintained separate online savings buckets with Capital One (formerly ING).  These online accounts serve two purposes: First, they pay significantly more than brick-and-mortar savings accounts do.  Even with the paltry rates of 2018, 2% is better than 0.2%.  Second, they serve the function of keeping your emergency money separate and apart from your regular money.

I have “buckets” set up at Capital One for an Emergency Fund, but I’ve also opened separate accounts for things like home improvement savings, vacations, and saving for the down payment on the next car.  By compartmentalizing our funds like this, we don’t have to “remember not to forget” that the $4,000 we’ve been putting aside for vacation is sitting in the checking account.

If you don’t have an emergency fund, the best way to start one is in an online savings account, separate from your regular account and to set up an automatic online investment that pulls the money out of your regular account just as soon as it goes in.  I love this method of paying yourself first.  If you are funding an emergency fund with whatever is leftover at the end of the month, you are not likely to get the bucket all the way filled.  By paying yourself first, and then making it through the month on what’s left, you are!

The added bonus of this is that it creates a snowball effect.  Once you’ve filled your emergency bucket with auto-withdrawals, you can set up an auto-withdrawal into a brokerage account or increase your IRA or 401(k) savings with the amount that you were putting into the emergency fund.

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