Emergency Fund- Just Do It a Different Approach
When I first started out on my personal finance journey I was reading everything I could get my hands on and 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.
The What and Why About an 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, and Grandpa Ernest(page 22 and 23) which is from an older Berkshire Hathaway shareholder letter. 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? Car breaks down, emergency. Emergency room visit, emergency(Healthy Emergency Fund), Lose your job, emergency. All of these are unexpected in some way or another. This fund should not be used for every day items or expensive items you can’t pass up. Wrong fund, wrong emergency.
Start Where and How Much?
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(keep reading below for my different approach). So that is my recommendation let’s START an emergency fund and get the balance up to $1000. As far as where to keep it, honestly people make this so difficult, don’t over-think it. Have a savings account? Good keep it 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. Any easy solution is to make your savings account deposit only(not all banks tell you about this option) or take away access from your debit/ATM card, this way you have 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.
Just Do It-A Different Approach
I went about building my emergency fund, much different than most personal finance experts would recommend. I was struggling to set aside the money for my 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 bank, even putting money tucked away in my sock drawer. It was not that I didn’t have discipline to save, it was that I wanted to pay off my debt more than I wanted to save for an emergency. Then I decided 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 every day expenses I had it was usually short lived. For example I would invest a couple hundred dollars in a Sharebuilder Roth IRA but stopped investing to pay more of my college tuition or go on spring break, I’m not really sure of the true answer anymore.
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 it there without paying off debt. I went to the website, I use http://www.computershare.com to see what stocks and plans were available. They had 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 was a $50 monthly reoccurring investment, this 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 and eventually increased my contribution after I cancelled 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, it forced me to save up money that I would only use in case of an emergency.
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 and find a solution that made me excited, that made me want to to invest, and that is why I am now the proud of owner of Nike stock and a Just Do It Emergency Fund. While the Just Do It path worked for me, it might not work for everyone but here is the Pro’s and Con’s of my choice.
- If an emergency happens I have money saved up just for this occasion, that’s what it’s all about right
- Allowed me to save money in a way that made me excited about an emergency fund
- Increased my knowledge of stock criteria and dividend information while I researched the company
- Allows my stock purchase/emergency fund to increase in value with growth and dividends
- I can go to the Nike annual shareholders meeting, it’s not Berkshire Hathaway as I”m sure Mr. 1500 and Planting Our Pennies will tell you, but maybe one day I’ll go see MJ, Phil Knight, Charles Barkley, honestly I don’t know who attends, would be great if they did though.
- My account is not as liquid as a savings account, it will most likely take 3-5 business days to retrieve my funds
- Most emergency’s don’t wait for a person to sell stock to pay the bill(Reasons I have a HSA and House Emergency Fund)
- My stock purchase/emergency fund may decrease in value
- I will have to pay a fee to sell my stock, with a savings account you just withdraw the money
- I will have to pay taxes on any profits and dividends(I leave this up to my tax adviser)
Emergency Debt Journey
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 starts with my journey to Even Steven and becoming debt free, the journey which is an uphill climb will transition to running downhill toward financial independence and the ability to leave the 9-5 job of living and working in the Concrete Jungle of Chicago. My emergency fund is no different it’s in the early stages, I have built up an emergency fund for my health, home, and personal occurrences. I don’t know if I will want 3 months or 3 years of expenses in my emergency fund. I might put it all in Nike stock or let it sit in a savings account at a small bank in Wisconsin. I’m not ready to make that decision, as I get closer to Even Steven my rough draft will get revised and closer to the final copy, but until then I am going to take Nike’s advice, add my own personal touch of saving, paying off debt, investing, and earning and 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?
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Photo inserted in document courtesy of nikeinc.com