Help! …Establishing an Emergency Fund Part 1

I remember the Detroit teachers’ strike in October 2006.  I offered financial literacy courses to help them navigate those hard economic times. The strike was not even a week old when many found themselves on the brink of bankruptcy. The stories of the teachers who were forced to stand in the long lines at the Detroit Teachers’ Credit Union because they needed to take out a loan to help them pay for basic necessities, piled up.  Many were unable to support themselves without outside assistance. Many were essentially in on the job training when it came to the importance of establishing an emergency fund. There is a problem that too many of us feel it is necessary to prepare for a fire only when we smell smoke.

 

There is an Aesop’s Fable that I recalled after witnessing so many teachers in despair. It reads as follows:

 

The Ant and the Grasshopper

 

In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content.  An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

 

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

 

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

 

“Why bother about winter?” said the Grasshopper; we have got plenty of food at present.” But the Ant went on its way and continued its toil.  When the winter came the Grasshopper had no food and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the Grasshopper knew…

 

I was watching CNN and saw an older gentleman being interviewed who was worth over two million dollars. That might not sound amazing to you, but it is very amazing when I learned that he had never in his life earned over $11/hour.  He made a practice of investing his money and living beneath his means. He made sure to include another monthly bill to pay himself within a savings/investment account on a monthly basis. Investing is not just for the rich, but for all income and age levels.

 

It is important to have 6-9 months of living expenses saved before you begin to invest.  Additionally, these investment savings should be placed in a high yield savings account. “High yield” refers to the interest rate on the account.  In a regular checking account known to have as low as a .35% interest rate or even 0%, you are losing money when you factor in inflation.

 

Inflation is the rise of the general level of prices in the nation related to the increase in amount of money in circulation.  The result of inflation is the loss of value of currency. Inflation is why you could by a candy bar in the 70s for nickel but have to pay as much as a dollar at many stores today.  Inflation is the reason that gas prices continue to increase, making it more expensive to drive. If you are keeping your money under the mattress, in a safe in the basement, or anywhere that is not earning interest then your money is losing value as you read this.  Putting your money into a high yield savings account will ensure that your money will earn interest that will outpace inflation thereby retain its value and even grow in real value. Good examples of high yield savings accounts are ING Direct, Emigrant Direct, and One United Bank.  However, don’t take my word for it…visit www.bankrate.com and they will provide you with a listing of savings accounts with the highest yields.

 

Many of you might be thinking, “Six to nine months of living expenses!? I can barely make enough to pay the bills that I have now…much less save for 6-9 months of living expenses!” Well, let me remind you of the wealthy mindset I’ve been talking about in the webinars.  If this is your mentality you will never reach this goal. It is funny how when we want to save to purchase items such as a car, a television, that expensive necklace for a loved one for the holidays, or any other high-priced material item, we can become disciplined. The essence of “lay away” is the store forcing consumers to become disciplined to purchase material items.  Why can’t we force ourselves to have a “lay away” of an emergency fund and act as if it is just as important as the flat screen that you have been dying to have. People are motivated to invest in things that they deem to be important, and our values as a society has placed the purchase of material items above the financial security of our households…we need to change!

 

Making Molehills from the Mountain

 

Here is a quick tip that I like to give to those individuals who feel that they are unable to accumulate 6 months worth of savings.  Let’s say that after you have done your budget, you have calculated your monthly living expenses were $2,000. This means that for you to have an emergency fund you should have $12,000 in a savings account.  This may seem like a huge mountain to climb and because it is so enormous many might lose motivation. We need to keep you motivated in this process so let’s make a practice of “making a molehills from your mountain”.

 

I actually got this idea from an episode of Sesame Street that I saw many years ago that helped me to do my homework. There was an episode where a character was doing his homework and Big Bird was helping him. The character had a HUGE pile of homework in front of him and was so frustrated because he felt as if he would never get it done. Big Bird gave him some great advice. He made the character (who I forgot his name, but he was in a tree of some sort) put all of his homework away out of sight and take on only one assignment at a time. Psychologically the character didn’t feel like it was such an overwhelming task to see and do only one assignment at a time.  After awhile he was able to complete his entire task.

 

This is how we are supposed to take on our emergency fund. Using the previous example, if your emergency fund goal is $12,000 one shouldn’t try to take on saving $12,000 all at the same time. Making a molehill from your mountain means that you might not be able to come up with $12,000, but you might be able to come up with $500.  If you can just do that 24 times in the next two years, your emergency fund will be completed. This isn’t including any tax returns that you receive, bonuses at work, or any other unexpected windfalls that you can put towards your savings. We have all seen those who put things on lay-away, schedule a payment plan to purchase that new jacket in one year, and magically they are able to find the funds to complete the purchase in four months! If you are as aggressive as some are in purchasing material items, then you will have your emergency fund completed in no time at all.

 

The less you earn, the more important it is to be mindful of your expenditures.  Less income means less financial protection to provide a cushion during financial setbacks (job loss, salary reduction, rising gas prices, or medical emergencies).  Regardless of your income or financial position, it is up to you to make the decision to begin saving towards financial independence today!

 

Stay tuned for part 2…

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt – Part 1

Dealing With Debt – Part 2

Dealing With Debt – Part 3