When I first started out on my personal finance journey I was reading everything I could get my hands on. It seemed no matter which way I turned, everyone believes you should have an emergency fund. The only thing that people differ on is how much you should have and where you should keep this emergency fund. Let’s take a look into emergency funds a little further and why I chose to take a different approach and ultimately answer the question “Should You Invest Your Emergency Fund?”.
An emergency fund is an amount of money set aside for occasions that the individual deems an emergency. Some refer to this emergency fund as a rainy day fund. Financial cushion. Murphy’s benefactor. My personal favorite Grandpa Ernest(page 22 and 23), named after Warren Buffet’s grandfather.
The term emergency is left open to interpretation, but a clear way to think about this is to ask yourself: Is this is an unexpected expense or bill that came up at a moments notice?
A car breaks down, emergency. Emergency room visit, emergency, Lose your job, emergency. All of these are unexpected in some way or another. An emergency fund should not be used for everyday items or expensive items you can’t pass up. Wrong fund, wrong emergency.
This is where most experts start heading in a few different directions. The main point is that you have to start somewhere, everyone needs an emergency fund, period.
It’s not how much you have but rather that you have one. I chose to follow in the Dave Ramsey footsteps and his baby steps of reaching $1000 in an emergency fund before I started to pay off debt.
My personal approach is to build an emergency fund that allows you to sleep at night. When you first start an emergency fund a factor to consider is your debt. Debt is also an emergency one that can even cause sleepless nights. My personal recommendation when beginning an emergency fund is to get your balance built up to $1000 and then begin to pay off debt.
As far as where to keep it, honestly people make this so difficult, don’t over-think it.
Have a savings account?
Good put your emergency fund savings there. As long as you are keeping your emergency fund separate from your daily checking account this will suffice.
If you are afraid you are going to spend it on a new purse or power tool, let’s make it a little harder to get the money in your hands.
An easy solution is to make your savings account deposit only(not all banks tell you about this option). Another solution would be to take away access from your debit/ATM card. This strategy will force you to physically walk into the branch to retrieve your funds.
That’s one idea but there are many more. Open an online savings account, use a separate bank across town, keep it in an old cigar box/jewelry box, the main point is we want to keep this money liquid and available. Remember we don’t want to make this difficult, let’s start with the suggestions listed above, if that does not work, you might think of taking a different approach. Should You Invest Your Emergency Fund?
When I went about building my emergency fund I took a much different approach than most personal finance experts would recommend.
My struggle was to set aside the money for an emergency fund and keep it there. Instead, I would take the extra money and immediately start paying off my debt, no matter what savings account I put it in.
I tried the savings account at my bank, an online savings account, and even putting money tucked away in my sock drawer.
It was not that I didn’t have the discipline to save, it was that I wanted to pay off my debt more than I wanted to save for an emergency. Then I made the decision to try something different.
I remembered an old post at Get Rich Slowly about investing in direct stock purchase plans. I have always been interested in investing in stock, but with the amount of debt and everyday expenses I had, it was usually short-lived.
For example, I would invest a couple of hundred dollars in a Sharebuilder Roth IRA but stopped investing to pay off debt.
The idea of putting my emergency fund stashed away in a company that had the potential to go up and down for small amounts of money at a time really excited me.
I couldn’t think of a better way to start my emergency fund and actually keep the money there. I went to the website, Computershare to see what stocks and plans were available.
Computershare provided so many companies to choose from, everything from Coca-Cola to the Home Depot, even Nike.
Ever since I was a kid I have been a fan of Nike, from Ken Griffey Jr. to Michael Jordan, I bought and wore Nike shoes and clothing. I might be one of the most loyal Nike people out there and I don’t think it will ever change.
So when I saw Nike stock was available to purchase, I was hooked. The cost to start purchasing shares required a $50 monthly reoccurring investment. This investment also allowed the purchase of fractional shares, and the ability to re-invest my dividends, all at a small fee.
I started with $50 month. Eventually, I decided to increase my contribution. This occurred after I canceled my gym membership(the irony), but then I reached my goal of $1000.
I didn’t stop there though, I kept my reoccurring monthly investment going until I reached about 1 month worth of expenses. For me, it was the right thing to do. This strategy forced me to save up money that I would only use in case of an emergency. I made the decision that was right for me and that was to invest my emergency fund.
This is personal finance I do not recommend this strategy for everyone. If you are able to set your money aside in a savings account and that works for you, then do it.
In my case, it didn’t work for me so I had to improvise. I found a solution that made me excited to start and keep an emergency fund. While I sold those shares a couple years later to help pay off my student loans today I am still the proud of owner of Nike stock.
While the Just Do It emergency fund path worked for me, it might not work for everyone. Here are the Pros and Cons of my choice to consider.
As those of you who have been kind enough to stop by and read my blog from time to time know, I’m on a journey.
First, it started with my journey to become debt free. The journey was an uphill climb, but I did it. Today I have reached financial freedom and I am transitioning to running downhill toward financial independence.
My emergency fund like my financial life has been on a journey. I started with the simple approach of putting money in a savings account. My propensity to pay off debt derailed the simple approach to emergency funds. The Just Do It emergency fund was born, but later was used to pay off debt.
Today I keep things very simple. I keep approximately 3 months of expenses in a Vanguard Prime Money Market Fund. The current compound yield, the interest earned on the original principal invested and also on the interest earned in previous periods is 2.47%. The fund does have a commission fee of 0.16% for a real total of 2.31% which is very competitive with today’s interest rates.
Either way, make sure to get your emergency fund started today. Need some motivation? You can’t go wrong with “Just Do It”.
Where do you keep your emergency fund? Did you have trouble starting and keeping your emergency fund? Would you try the Just Do It Emergency Fund?