Guest Post: Finance 101: Building An Emergency Savings Fund

Jessie's note: The author mentions America, and while you all know that I'm Canadian, I beleive that the themes he talks about are applicable in all of North America.

The fact is that most Americans will earn several million dollars during the course of their professional careers.  That is a lot of money!!  Unfortunately, very few will actually retire comfortably, but the truth is that it is rarely ever due to not making enough money.  Usually, it is due to improperly managing the money one does make.

The truth is that managing money in a frugal manner in America is a very hard thing to do!  It is a real challenge to cut back on spending when our American culture is based on consumerism.  Every day all day long we are constantly bombarded with advertisements and marketing efforts that are shrewdly focused on bilking us out of our hard-earned cash.  But the good news is that with some determination and discipline, a person can break out of the consumer-based money-management behaviors that cause many Americans to not save.  No matter how deep your financial hole is, you can get out!

There are two primary poisons that try to kill our financial progress—debts and reckless spending.  Reckless spending can be cured immediately with the proper amount of personal will, but debts, of course, must be paid off over time.  The first step to personal financial success is determining to cut back on your spending.  A budget is 100% essential.  The second step is to address your debts.  Most Americans have a high level of credit card debt, and these must be addressed immediately.  The first step in addressing them is to stop using them!  The personal finance success formula is simple—cut back on spending, stop using credit cards, build up an emergency savings account, and then use excess savings that are a result of decreased spending to pay off debt.  It really is that simple.  Implementing this formula is where the difficulty is.

In this article, we are discussing the importance of building an emergency savings fund.  Most personal finance experts agree that there should be at least $1,000 in this account.  This account serves one major purpose.  It is designed to help you never use credit cards for unexpected expenses.  If the car gets a flat tire, or you have an unexpected doctor visit that requires a co-pay, or any other unexpected expense occurs, you should always have a small cushion of savings that can finance these expenses.  This will not only give you peace of mind, but it will also help to solidify your progress of not accumulating any more debt.

An emergency savings fund should be built before you jump headlong into paying off credit cards, college loans, car loans, and the mortgage.  Once you cut back on expenses, you should direct that extra money toward building the $1,000 emergency fund.  The easiest way to cut back on expenses is to keep track of all your expenses for one month by logging them in either a journal or an Word or Excel file.  Then, at the end of the month take an honest and objective look at where you are spending your hard-earned money.  A little common sense will make it clear where you are spending too much money.

As unexpected expenses arise, you can then dip into your emergency savings to make ends meet.  When you have to make a withdrawal to cover an expense, then your next objective should be to build your savings back up to $1,000 as soon as possible.  Building and faithfully maintaining this emergency savings fund should not be seen as an “option.”  It really is essential that you have a financial buffer in place to help in time of need.

Great Feedback!

Thank you to all the commenters for the feedback on the first draft of our potential house budget.  I'd like to summarize some of the comments here, and open the door for any others.  Quite a few folks had questions as well as suggestions, so I'll address those as well.

• Increase house maintenance budget by $100
• Our thinking in having the house maintenace budget at $100 was that it may be enough b/c before we move in we're planning on 40-60K worth of renovations, so we'll be starting out on a good footing.  That said, this may be something to look at if there's enough wiggle room in the budget.
• Don't forget about home owners insurance
• THANK YOU!
• WE Totally forgot about this.  I'll call to get a quote next week to fit this in.
• What about vehicle maintenance?
• This is part of our $500/month planned spending category
• What about vet bills?
• This is part of our $500/month planning spending category
• Horses actually have very few day to day expenses, and I administer all of her vaccinations
• We are planning on buying a dog however, and forgot to plan for that in this first draft!
• What about medical expenses?
• Our benefits cover our medical expenses
• If there are any additionals (which would be rare) it would come out of our $500/month planned psending
• How do you pay for your cell phones?
• Our allowances pay for these
• You have really big allowances, what do you have to pay for using those?
• Personal care (make up, hair cuts etc.)
• Our cell phone bills
• Lunches at work
• Gifts for each other
• Personal trips w/ friends
• Hobbies
• How come your gift budget is so high?
• For Christmas alone we have 18 groups of people to buy for
• There is also a significant amount of travel around Christmas, so we budget high to take in account for that as well
• Have you thought about gardening once you own your own home?
• We actually garden now, and do all of the yard maintenance for our place and my aunts place that we're going to be buying.  It's rare we have to buy anything anymore (we have a lot of tools etc.) and if/when we do - it comes out of our $500/month planning spending
• What about outdoor maintenance?
• Other than what I mentioned above, I'm not sure what theses costs would be.  But they would be included in the $500/month planned spending.

Summary
- We need to account for house insurance
- We need to see if $500/month is realistically enough for all the things I mentioned above that it's intded to cover
- Perhaps we need to look at our allowances and lower them, but then pay for our cell phones through our joint budget (really things would cost the same, just moving how it's orgaised around).

If anyone has any other suggestions, we'll gladly take them.  In a week or two, I'll post another draft budget.

Thank you!

House Budget Help

It may be a tad early, but Jordan and I have come up with a budget for when we are homeowners.  I'd like to share it with you in draft version - I'm hoping that any home owners who read this blog can share with us any insights on what we might be missing.

So, what do you think?

In theory, our incomes will be 5-6% higher and our vehicle insurance will be lower in a years time - but that's not a guarantee.

House Fund Goal

Now that we have a number, Jordan and I can solidify our house fund goal.

• At least 5% downpayment
• At least $5,000 closing costs
• we won't need to pay a realator, but we will have legal fees and I'm sure other things that we don't know about.

So, while we won't be pushing to reach our new goal until after Christmas - we know what it is.

Before anyone comments and says that we ought to have 20% to avoid mortgage insurance, we know that technically we would be better off if we saved $52,500 - but it is simply not realistic.  If we save more than the initial $20,000 - that will be fantastic, but we know that once we have that amount saved, we'll be technically ready to take the next step - that's when we'll talk to my aunt about firming up a timeline.  There is no point doing it any time sooner.

Jordan and I also talked about saving an additional $10,000 cash for things above and beyond the renovations that we will need to do.  These things would include new appliances and any new furniture that we would need.  We will push for this once we hit $20,000.

What's Next?

Now that Jordan and I are debt free, we are going to work on some of our short term goals before we ramp up our house fund.

Coming up right away are our:

• Christmas Fund
• Need to get to $1,500 in short order
• This pays for gifts as well as decorations and extra travel
• Travel Fund (new)
• We would like to set aside around $500 for summer travel plans
• If the house purchase goes through sooner rather than later, this could quickly be absorbed by the house fund
• Emergency Fund
• We would like to eventually have about $7,000 tucked away - but for now, I would be happy if we had $1,000.

• Education
• Jordan's going back to school
• This will probably cost $100-$200 for books ect.
• I'm going to start pursuing my CHRP
• Over the course of a year, this is going to cost about $1,000

We've decided that education is a joint expense because the benefits (increased income) is a joint reward.

We Have a Number

Jordan and I had a great conversation with my great aunt this weekend about....MONEY.

We showed her the market analysis that was completed on her house and then showed her what we thought a fair market price would be based on the information the real estate agent guy showed us (about $300,000K on the open market - if her home was ready to be sold).

As there is an expectation that my great aunt will leave her home the way it is when she sells which is NOT move in ready.  Renovations would be required as would a lot of cleaning to get rid of the smoke, we started with a range of $250,000 - $275,000, we talked about what Jordan and I could afford and what my great aunt was expecting in terms of the sale of the house.  My Great Aunt told us that the range we were thinking of was the same range she was thinking of.  She suggested a number in between, so $262,500.

She asked us if we could make that work, and we said it would.  We asked her if it was enough money for her to either buy a small condo for herself, or to give her enough money for rent in an assisted living place (she's exploring options right now).  She said that it was absolutely plenty.  She has three healthy pensions as well as a variety of personal savings - she doesn't need the money.

Throughout the entire conversation, I sat next to my Aunt and Jordan sat across from us.  It was important that we didn't overwhelm her by our posture/eagerness.  As  hard as it was, I didn't talk throughout the whole conversation and questions to engage my Aunt.  

Jordan and I went in the conversation knowing that if my Great Aunt wanted over $300,000 or so - it probably would have been a deal breaker - because although her home is in a very desirable neighborhood, you can get a brand new townhouse for about $350,000.  If that was the case, we were fully prepared to still help her on her search for her next home when she's ready and help clean up her place (as best we could w/out investing our own cash) to get it ready to sell.  I think knowing that we didn't HAVE to come out of the conversation with a price or a deal, really made it easier to have a great conversation - and, it wound up working out, because we do have a price.

So, we know what the price will be, what we don't have is a set timeline but we are looking at a range of 8-18 months.

DEBT FREE!

As of today, Jordan and I are 100% debt free!

Jordan and I worked the numbers last night and have decided to manage our credit card based on our billing cycle not necessary our monthly budget.  So our monthly budget will actually include the last three weeks of a month and then the first week of the following month.  When I projected the numbers through to the end of October, there was absolutely no reason for us not to pay of my Alberta Student Loan, TODAY!

I called the student loan people and arranged to have my final payment debited from our joint account today.  It will take a few days to process, but they won't bill me for any additional interest.  We will receive a letter in the mail within the next two weeks that formally recognizes that the debt has been paid.

When we started this Journey we were $20,136.75 in debt.  I previously hadn't included Jordan's debt with mine - and now that I am, it's a seriously impressive number (it's bigger than I thought).  I am absolutely pleased that we were able to pay off this sum in a year and a half.

This is how the original debt broke down:

• Jessie's Alberta Student Loan: $6,141.75
• paid August 20, 2010
• Jessie's Canada Student Loan: $4,495.00
• paid April 30, 2010
• Jessie's Credit Card: $4,500 (approximately)
• paid September 8, 2009
• Jordan's Credit Card: $500.00
• paid July 30, 2010
• Jordan's Truck Loan: $4,500.00
• paid May 20, 2010

Thank you so much to all of the readers and blogger's who have provided us with support during this journey. I hope you stay with us as our financial selves grow into home owners, new vehicle purchasers and awesome future money planners.

~Jessie & Jordan~