How To Save With Your Emergency Fund

Your emergency savings is set aside to be used for NOTHING but emergencies.  Right?  Right!  But that very fund (3-6 months of expenses) can also be used to help save on insurance premiums.

Think of it this way: because the purpose of insurance is to transfer risk from us to the insurance company, having a good emergency fund allows you to assume a bit more risk by raising your deductibles and therefore lowering your premiums.

Run Some Numbers To Find Out

Of course you have to run the numbers to see if this is a good idea for you.  For example, if raising your auto collision deductible from $100 to $1000 will save you $500/year on premiums (these are numbers from a real quote), you would only need to go accident free for about two years to justify the higher deductible.  If you saved $100/year on homeowners insurance by raising the deductible from $500 to $1000, you would need to go five years without a claim to justify the higher deductible.

Health Insurance Savings Adds Up

While the auto or homeowners savings may not dramatically change your world, the potential savings in health insurance could.   Assuming good health, a family of four can reduce their premiums from $600 per month to $300 per month by switching from a traditional $25 co-pay plan to a High Deductible Health Plan (HDHP) requiring a family deductible of $4,000 per year.  If your emergency fund is already in place, you could switch immediately and save $3,600 annually on your premiums.   And it keeps getting better, because when you place those premium savings in a Health Savings Account (HSA) you could save you another $1,000 in taxes.  Remember, the deductible goes toward the first $4000 in medical expenses, but your potential savings is $4200 a year. This is worth getting excited about!

Get Your Emergency Fund Started

If you already have an emergency fund, put it to work for you.  If you don’t have one, you need one.

Start saving for it today!

This has been another guest article by Joe Plemon of Plemon Financial Coaching.

photo above by obLiterated

Other good reads on Emergency Funds:

• Consumerism Commentary: The New Emergency Fund
• Paid Twice: What does an Emergency Fund Mean to You
• Think Your Way To Wealth: The Emergency Fund: Where to Keep it and Why
• Prime Time Money: Your Emergency Fund is So Big

Securities offered through LPL Financial, Member FINRA/SIPC

Emergency Fund To The Rescue

When dealing with a new client the first thing I review might be a surprise. Is it there asset allocation? Not first. Is it the overall beta of the portfolio? Nope not that either. Well it must be the overall strength of their holdings, right? Strike three. Believe it or not, the first item I review is to make sure they have enough money in their emergency fund.

How Much is Enough for an Emergency Fund?

Typically, 3 to 6 months of expenses is the norm. But in a day an age where credit cards are rampant and the housing mess has hurt many families, I would recommend having at least 8 months worth of expenses. Some planners may even suggest up to 12 months. If you have a job that is sales oriented and commission driven, you should be more on the 12 month side. By having a cash reserve, you are protecting yourself of having to use high cost ways of borrowing i.e. credit cards, pay day loans, home equity loans or lines of credit.

Where do You Put Your Emergency Fund?

photo credit: Javier Aroche

You want the money to be liquid. That is a necessity. Checking Accounts, high yield interest savings accounts, money market accounts, CD’s and short term bond funds make good places to park your money (Avoid Auction Rate Securities).

Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. Stocks are somewhat more liquid than real estate, but you can lose money on stocks if you’re forced to sell at a time when the market for your stock is less than favorable. Even though interest on liquid investments may barely keep up with inflation, the lower risk is worth the lower return when you may need the money quickly.

Always Shop Interest Rates

Always make sure to shop around. Although it can be convenient to have all your money at one bank, some institutions may offer a considerable more. I have seen checking accounts pay as low as .25% when you could get a money market account paying more than 4%. It always pays to investigate. More interest earned equals more money in case of an emergency.

More to Save, Consider a CD Ladder

If you an adequate amount in your savings, you may consider doing a CD ladder as Patrick did from Cash Money Life.  A CD ladder will potentially help earn a higher yield without having all your money tied up for a significant time period.

Other reads on emergency funds:

• Moolamony: 10 reasons to have an emergency fund
• Get Rich Slowly: Which Online Savings Accounts is Best?
• Frugal Dad: The Need for a Local Emergency Fund
• Free From Broke: Reader Help: Building a Cd Ladder

Securities offered through LPL Financial, Member FINRA/SIPC