Friday, February 1, 2008

Super Emergency Fund

Recently, I have talked about having an emergency fund in place, and paying off your debt (minus the mortgage) as soon as possible. But what about after getting your debt paid off, and you have a fully funded emrgency fund? This where you create a SUPER EMERGENCY FUND (SEF).

An SEF is an emergency fund on steroids. It is there to protect you in the event of something catastrophic, such as a job loss, prlonged illness, or even a disability. Typically, most financial counselors will recommend saving 3-6 months worth of expenses, but I tend to be more conservative, so if possible, I say go for 6-9 months worth of expenses saved up, or better yet, a year.

I hear it now..."Whoa, wait a second! 6-9 months of saved expenses? I can barely make my payments now!". Keep in mind, this is after you pay off all debts except the mortgage. I'll use myself as an example...after paying all our debts off (minus the house), we will have a total of about $700 (as we pay off each debt, the extra goes to the next smallest debt balance, to pay it off faster). Our personal goal is to have $15,000 saved in a SEF, which would take us approximately 21 months to accomplish. Looking at that way, it won't really take that long to accumulate a nice SEF, for a REAL rainy day. Even better, having it in a MMA or mututal fund will help it grow faster, with interest. Using the MMA we use now for our regular emergency fund, we would have about $16,000 with the interest earned.

The peace of mind the SEF gives you, will do wonders for your relationship with your spouse, not to mention your overall quality of life. Not fighting over money, knowing if something happens, you'll more than likely be able to cover it financially without going back into debt is priceless. My wife cinfided to me how much more secure she felt, knowing we had an emergecny fund in place, for those "what-if's" (and fellas, if I had known what THAT would have done for our relationship, I would have had an emergency fund YEARS ago!). Knowing that if you lose a source of income through layoffs or worse, an injury or sickness, you will have enough time to replace that income, or receive disability (disability insurance is very cheap, and should be a part of your overall financial plan, even if not offered through your employer. The SEF will help you get through until your long-term disability kicks in), because of the foresight you had to plan for that big bump in the road we call life.

Go ahead and get that super rainy day fund saved up, for those monsoons life sooner or later is going to send your way.

No comments: