Emergency (and other) Savings?

Avatar for phoenixmama
iVillage Member
Registered: 03-20-2003
Emergency (and other) Savings?
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Sun, 05-04-2003 - 12:39am
I'm curious who has any emergency savings and why or why not, how much do you think should be in it? And any other type of savings for that matter.

I've been thinking about how quick I could pay off debt if I put ALL my extra money into it. Then again, if I put ALL my money towards debt and have NO savings, what happens when I have an emergency? That's right, back further in debt.

My minimum monthly debt payments are about $135, typical payment is $200 or more. But I'm also putting $50 pretax every 2 weeks into retirement (they match $100), payroll direct deposits $25 per paycheck into my son's 529, and I've started putting $50 per paycheck into ING for emergency savings. Actually, some say 10% should go to savings and that's what I put in this time. I have a large student loan "refund" coming this week and I think I'll put 10% of that to savings too.

My parents didn't have college money set aside for me or my sibs - we are paying our own way through scholarships, grants, loans, work. Now, I personally want to pay for 1/2 of my son's education. He's 3 now, and by the time he gets to college it could be $200k for 4 years of public school! All the more reason to start saving now. And I never thought about retirement funds until I got this job in staff benefits. And I realize by the time I'm of retirement age, I can't plan on a penny from social security, so the sooner I start saving, the more money I'll have to live comfortably in my old age. I only started my retirement account this past November, and DS's 529 this Jan, and I've already built up $2200!

"Experts" have said you should have 3 months worth of living expenses, in some liquid (accesible) emergency fund. Given the current economy, some are now saying 6-9 months worth due to so many people getting laid off. Seriously, do the math and think about those numbers for a minute. Anyone, any comments?

~Jen

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Avatar for mymartes
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Registered: 03-26-2003
Sun, 05-04-2003 - 11:33am
Jen

I think that's great that you are saving for your son's future. My h and I are in major cc debt. However, I make sure to save whatever I can for our twins' future. They are 17months old. I started w/$ they rec'd when they were born, what the got for their 1st birthday. I am a SAHM. When I stopped working, the compnay I worked for sent me a check for the balance of my 401K. I decided I was going to put that toward their saving.

I started an emergency fund. I currently have $500. However, my concentration is to payoff the debts. I figure that the banks are paying 1% or less of interest. On the ccs I'm paying higher interest. I personally think it's better to try to payoff the most u can on your debt. Keep a little something aside for emergencies.

Just a thought.

Good luck.

MYM

Avatar for zaboz
iVillage Member
Registered: 03-26-2003
Sun, 05-04-2003 - 11:41am
One of the reasons I started worrying about our finances in the first place was

because we just couldn't save. There was never any money left over.

So for me, now that we're getting a better grip on things, it's important to try to save a little. Some months I save a decent amount and some months I have to "borrow" against it. Right now we have $1100. I'm proud of it but at the same time, like you said, it won't go very far if we should have a real emergency. I'd really like to build it up so that if one of us loses our job we could comfortably survive for at least two months. But that's a lot of money and it seems impossible sometimes.

Because you're a single mother, I would definitely want some savings.

Contributing to retirement is a great idea too. Especially with the match. I just started saving for retirement this year too. At first it was hard but now I don't even miss it. I know if I can keep it up it will pay off. I really don't want to be poor when I'm old! Especially because we don't have kids, I know that we will have to take care of ourselves. I want to be able to travel and have some freedom and that will

be impossible unless we have a nice savings account built up. I love to go to

Money.com and use their savings calculator. If we can keep saving for retirement and then, once our debt is paid, save that money too, it's just amazing what we will have in 20 or 30 years. It's one of the things that keeps me going when I get sick of working so hard.

Avatar for cl_beckymk
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Registered: 03-19-2003
Sun, 05-04-2003 - 1:36pm
This is coming from personal experience...I would put more into an emergency fund any day rather than throwing it at debt. Now, I *know* how hard it is to look at those numbers and realize "Hey, I have X dollars in the bank and it could be gone".

As we are in the "being laid off" category and basically had NOTHING saved. Our saving grace has been a tax refund, church, my parents, unemployment and public aid. Between all of that we have kept our head above water but not without glitches and *barely*. We had no idea it would be so hard to get a job when you have good experience, great reference letters, etc... DH is changing careers and frankly it would have been a LOT better if we had a nice cushion for once he gets started instead of going with blind faith on it. If nothing else...several months of rent/mortgage would be nice to have saved, THAT is our #1 hardest expense and puts you between a rock & hard place because when you are unemployed, it's hard to find a new place to live (no one will give you a new mortgage even on a cheaper place nor can you get a lease, so....).

That's also why I like snowflaking...I also agree with paying off it faster than min. payment but sending in an extra $10 or $20/month will work better with still being able to save. :)

Once we get back on our feet completely, I fully intend to work more seriously on having a savings (I had started on the Freedom Account idea for those "unexpected" expenses, those are a downfall for me too, so I was at least starting).

Becky

iVillage Member
Registered: 03-27-2003
Sun, 05-04-2003 - 10:45pm
Well at this point I am throwing it all at my debt. If I had an emergency, both DH and I have parents we could turn too for the short term, also we don't have children yet. But I know this: A lot (maybe all?) of companies will let you take a loan from your 401k. You pay some interest, but it is probably less than your cc's unless you have 0% interest rates. So that could be a good back-up plan until your debt is down and you can sock more away.

Rebecca

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Registered: 03-27-2003
Mon, 05-05-2003 - 1:57am
Yeah, this is a complicated issue, and one we struggle with too. We've always had that problem of feeling like just when we're starting to get ahead, some unexpected thing comes up--a car repair, clothes that need replacing, unexpected tax bill, whatever--and bam--there go our savings. Or, worse, we're set back in our debt repayment.

Now, though, I am using a formula based largely on advice from Mary Hunt's "Debt-Proof Living" (I borrowed a copy from our library--very worth the read!). One of the biggest things we are doing differently after reading her book is anticipating "nonrecurring expenses" (little things we used to call "emergencies"). What we did, is we went back through the past year's records and added up all the money we spent on little emergencies from car repairs to new tires to appliance repairs, as well as money we spent on clothes, gifts, and Christmas. I was astounded how much we spend on vehicles! Anyway, we added each category up and divided by twelve, and that told us how much (approximately) we need to save each month for "unexpected" expenses. Then we worked and reworked the numbers in our budget (and there's not much to work with--our income is 38k and our debt is 28k), shaving $5 off here and $5 off there until we found the money to fund that amount every month into a new fund we're calling our freedom account (a name borrowed from Hunt's book). Now, when a "nonrecurring expense" crops up, we'll fund it out of that fund.

Separately, we have a small "contingency fund," which is intended for use for *real* emergencies--the loss of a job, sudden large medical expenses, and so on. Things that we really can't anticipate based on past experience, the big stuff. Right now, we're only funding it by $50 a month. But I feel pretty good about it, because we're unlikely to have to deplete it for car repairs or other sudden expenses, because those things are covered by the freedom account.

We also contribute to dh's 401k, because it's hard to beat the return on your investment when the company is matching funds. Besides, I'm tired of robbing my future to pay for the present. It's time to start paying down my future.

Meanwhile, our debt repayment may not go as quickly as it would if we were putting all that money toward debt, but we have a significant buffer against incurring more debt, and that buffer will grow. By the time we're out of debt, we'll already have a headstart toward true financial freedom, and we'll already have developed the habits that will help us remain debt free.

My advice used to be different. I would have said, put it all toward debt. But I believe in the power of habit, and in the power of slow but steady. Nothing's worse for your morale than having to go back into debt to cover car repairs or a new roof or dental work or whatever. And nothing's better for your future than to build the habit of methodical savings.

Yeah, it'll take you a long time to reach that 3-6-9 month window. But in the meantime, you will build up a week, then two weeks, then three, worth of savings. And once your debt *is* paid off, you'll grow that contingency fund even faster. You'll be there before you know it, the same way your credit cards got where they are before you realized it. It's all about developing healthy habits, bit by bit.

Blessings,

Heather

Avatar for cl_beckymk
iVillage Member
Registered: 03-19-2003
Mon, 05-05-2003 - 9:07am
Yes, that is a good plan if there is a major emergency but if you lose your job, then you can't take a loan, you would have to withdraw it and there is some hefty tax penalties involved in that. Just wanted to point that out. :)

Becky

iVillage Member
Registered: 03-31-2003
Mon, 05-05-2003 - 9:14am
Up until last month I had 1 month of living expenses in savings, plus a 'secret' ING account that had about another month's worth. Then I went on a compulsive spending spree, and liquidated everything. I even had a $25 bank charge for an overdraft they paid.

Since I'm yoked with someone who makes more money than I do, and owns our home, I don't have as much panic as I used to about building up my savings. I plan to put 10% into my bank savings, and a little more than that into ING.

I put 12% pre-tax into my company's 401(k).

My 'real' plan is to get my inheritance (soon I hope), which will pay off $5K in credit card debt, leaving about $8K total debt; putting $2500 in savings, and spending $2500 on home furnishings, most likely a new computer.

Actually, I just got some paperwork about another great-aunt who died, and I'm in her will too. I don't know for how much yet, but I'll probably make the same split, 50-25-25 to debt, savings, and home furnishings.

Lee Ann

www.werenotafraid.com

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Registered: 03-26-2003
Mon, 05-05-2003 - 11:58am
I have the same problem, striking a balance between savings and debt repayment, but one thing I feel strongly about is that you have to find some sort of arrangement where you can put a little into both. Pretty much everything I read - and I read alot about money and budgets - says that you should do a little bit of both. Obviously if you have not money left over after paying your minimum payments then you should focus on debt. But when snowballing, or faced with a little extra cash, you should try to allocate at least a little bit to savings for emergencies. Like someone else said, you will be even more in debt if an emergency creeps up and you dont have savings - and those emergencies always seem to happen.

On a side note, I always try to put money first into my 401k becuase my company matches. Even if your credit card debt is 20% interest rate - if you company is matching 50% or more, you are still making money in the long run by putting it in the 401k as opposed to extra towards debt. Not to mention the tax free returns on your money that push that return even higher.

So I still havent figured out what the *optimal* split for me is between debt, emergency savings, and 401k and I think it is different for everyone. but try to get a little of each even if it is only $20 a month or something.

Megan

iVillage Member
Registered: 04-02-2003
Mon, 05-05-2003 - 12:07pm
I agree completely with heather.head. Probably, because I'm also following the Mary Hunt plan. I think it's important that we both save and pay off debt at the same time. It may take a bit longer, but if all of your income goes toward debt and current expenses, you have nothing to fall back on. I, too, have started both freedom and contingency accounts. Although I haven't been faithful to my freedom account, I was able to pay my HOA dues and my car insurance without totally screwing up the rest of the month. This the first time this has happened. You need to have some financial cushion and should never spend (even on debt repayment) every dollar that you have.

One other thing I've noticed and is somewhat of a concern is the number of people funding their child's education rather than their retirement. I've read several financial books over the past few months and pretty much they all say that this is a mistake. I'm a mom and completely understand our desire to do everything possible for our children, but we shouldn't do it at the expense of our futures. There will always be scholarships, grants, and other types of financial aid available for school. There is no such aid for retirees (unless you think you can count on social security). I'm sure that most kids would trade some help paying for school in exchange for not having to take care of their parents when the parents retire. In the ideal world, you could do both. If not possible I personally lean towards retirement.

My parents never saved a dime for school and 2 of the 4 of us are college graduates (one is still in high school, the other dropped out not for financial reasons). I went to graduate school for free. My brother went to a state school and had only a few loans. I worked, took out loans, etc. for school and got through just fine (at an expensive east coast private school). It's not like you won't be working when the kids start college and that you have to pay the whole $200,000 at once. The latest Suze Orman book and "Money Shy to Money Sure" by Olivia Mellon address this issue in depth. I figure if I can pay about $700 per month for my son to go to daycare now, unless all HE** breaks loose, I'll be able to continue to contribute out of current funds in 13 years.

Just my opinion.

Momtochris

iVillage Member
Registered: 03-28-2003
Mon, 05-05-2003 - 1:10pm
Learning to save is actually what helped me the most with my debt reduction. I started out following the advice in the book How To Get What You Want In Life With the Money You Already Have. My cards were at 0% so I paid the minimums and saved everything I could. When the 0% ended I had almost $4000 in savings. I then reversed my strategy and began paying the minimum to my savings and everything else to debt.

My savings include DH's 401K at 8% with a company match, my 401K at 4% with a 3% company match, and I'm saving 1/12 of our total bills and expenses each month for emergencies. This way after 12 months I'll have savings for a month of bills and expenses. As the debts are paid the savings will increase.

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