As I mentioned in my previous article, “The Emergency Fund Formula,” it is important to have an eight-month emergency fund..This fund should be based on your monthly living expenses, and you need this fund as a kind of padding in case something unexpected should happen to your salary.
Starting such a fund may seem a bit daunting. After all, it won’t be easy to simply set aside eight months’ worth of expenses. If you needed, say, $1,250 per month to live on, that means you would need to get an emergency fund of $10,000. But before you go out and get a second job to make up this $10,000, it would be wise to first employ your creative side.
What I’m asking you to do is to put on your explorer hat and go on a voyage of discovery – to discover money you already have. You will probably learn that you are closer to already having that $10,000 than you think!
Let’s say that the company you work for offers you a pension plan for retirement. Why don’t you go through your papers and find the current balance on that retirement pension. Let’s say it’s $10,000. Write that down on your emergency fund “assets” chart. So congratulations – you already have the full $10,000!
But before you go out and celebrate, let’s be prudent here. That pension money is special, because it is meant for your retirement days. Also, it likely has an early-withdrawal penalty attached to it. So even though it is there in case of an emergency, it should be avoided if at all possible.
So why don’t you go around your house and spelunk through the clutter? Perhaps you’ll find a nice watch that you never wear but which you remember spending lots of money for. Take it down to the pawn shop or check the going market rate on EBay for a similar watch. Let’s say the pawn dealer or the EBay quotes basically say that this watch can sell for approximately $500. You need to realize that what you are holding in your hands is not simply a watch – it’s also $500 in equity! So why don’t you add it to your Emergency Fund Chart as well?
Your chart should now look something like this:
I NEED: $10,000
I HAVE: $9,500 from my pension at work
$ 500 from my watch
Notice that, because you were able to find $500 in equity from your watch, you were thus able to free up $500 from your pension – so now you only need to rely on $9,500 from that pension! It’s still not the ideal situation, but you’re moving in the right direction!
Maybe you remember that you have $1,000 in a certificate of deposit at the bank. Add that to the chart, and bring down your pension allotment to $8,500.
For Christmas, someone gave you a $50 Visa gift card. Even though it’s not cash, it’s still equity – so it goes onto your Emergency Fund Chart as well.
Before you know it, you might discover that you already have $5,000 in cash and equity lying around. So that’s $5,000 of your pension that you do not have to cash out in the event of an emergency.
Your next step is to set aside some income from your monthly salary to go into that emergency fund, and each time you beef up the fund, that’s more that can be reduced from the extremely valuable retirement allotment.
You may even realize that having a $500 watch lying around gathering dust – and lying vulnerable for thieves – is not such a good idea. Especially if you never even wear the watch. The longer you wait to sell a dud object like that, the more it will depreciate in value. So liquidate those assets if you feel you can no longer derive any more pleasure from them. Take that money and put it in the emergency fund.
You will finally be able to truly celebrate when your emergency fund is completely liquid and is earning interest in some kind of easily-accessible and penalty-free account. But for now, you owe it to yourself to gain at least some security in the knowledge that you do have some money somewhere – or equity thereof – and that in the event of an emergency, you would be okay.
By the way, if anyone wants to buy a ridiculous, overpriced giant Shrek doll that I can't believe I ever spent good money on, just shoot me an email.