Editor’s Note: Please be aware this article was originally published February 9th, titled as Moolanomy’s Checking On My Progress. The permalink (moolanomys-checking-on-my-progress) for this article has not changed so it is safe to link to this article while the title may change as this article is revised inline with the goals for TheLocoMono to create a professional sounding personal finance blog.

My 2008 Emergency Fund Progress

Since this article will be updated month, it is only sensible to create one table to write by for the remainder of the year. I will try to update this post on the first of each month since it is fairly simple as entering the numbers. In the table below, the 1st four columns are fairly self-explainable.

% of Yearly Target which measures the balance of my emergency fund and translate the balance into the percentage of the target goal for the emergency fund. In other words, the goal for 2008 is to have $3,000 in my emergency fund. As of April 1st, I have met roughly 34 percent of my goal. As long as I keep automating my transfers and the interests keep coming in, as well as a zero need for an emergency, this percentage will keep rising each month.

# of Months will measure how long my present balance can sustain me in an emergency. In this case, I am using the projected monthly expenses of $1,500 as my measuring stick. As of March 1st, with my current balance, my emergency fund would last roughly 3/4 of a month (3 weeks).

In November of 2007, I published my Cash Money Life’s Financial Goal Challenge for the first edition of the Carnival of Financial Goals. The carnival is about setting financial goals and my goal is to set up 2 months’ worth of projected expenses of 3K by September 2008 which is when I plan to relocate to a new state. Pinyo of Moolanomy “tagged” me after missing his goal and dealing with failure to follow up on how I was doing with my goal.

Ending the Emergency Fund

Any time you set a goal, you should try to see the end in your mind that you have for your goal. For example, if your goal is to win the gold medal in the Olympics, then picture yourself winning the goal and work towards it. At first, when I thought about the end in my mind for my emergency fund, I said to myself, I am most comfortable with having 12 months worth of spending. So that was the end in my mind about a month ago.

The end changed recently in light of two things.

Point # 1 : Monthly Spending Plus Deductibles

Being Frugal posted an article about the 3rd step in Dave Ramsey’s 7 Baby Steps, having a fully funded emergency fund. She talked about the value of having at least 6 months worth of monthly expenses in your emergency account as well as being able to pay the deductible for insurance purposes. I have not had the pleasure of reading Dave’s work since everyone talks about him. What I noticed was he talks about expenses, not spending as David Bach talks about.

David Bach talks about having 3 to 12 months worth of spending. You have your expenses such as your rent or mortgage, your utilities, etc… but it is also wise to remember you also may have other spending “expenses” such as gas, clothes, credit card repayments, etc… I just happen to side with David Bach on the use of the term “spending” versus Ramsey’s use of the term “expenses” because to me, that sounds like selling yourself short.

While I only have my health insurance to deal with, eventually, I will have a car once again. It made me realize I can seize the opportunity to put away additional money in my emergency fund on top of my projected monthly expenses for deductibles. It is a fairly well-known fact that having a high deductible insurance policy (regardless of whether it is health, car, home, fire, etc…) means you pay lower premiums. I can start with a $500 deductible then later raise it to $1000 as long as I know I have that much ready in my emergency fund should the need arise. That’s on top of my expenses, not to be mistaken for as part of my expenses. In other words, $1500 monthly expense plus $1000 deductible = 2,500 smackaroos.

The cool part is I can keep raising this as high as I want to go, $500, $1,000, $2000, $5000, etc… I just need to figure out the cost advantage of doing this. Plus what if I have a $1000 deductible for my car, and $5000 deductible for my health, and $2500 for my property insurance? It does add up.

Point # 2 : There is only 1 end result.

I couldn’t come up with a better point. I was reading a book and it hit home for me. One of the two main characters, a sweet little old lady who happened to be a former IRS agent, showed her friend the passbook she kept her emergency fund in, an amount totaling nearly $150,000. It had been bothering me as to why would that amount be sitting as an emergency fund when all the personal finance gurus talks about having 3, 6 or 12 months worth of expenses.

It is in the way you think. No one likes to talk about death. You might die tomorrow, you might die 80 years from now. Who knows, who cares? The point is this, don’t aim for 3, 6, or 12 months. Get into the habit of putting away a little bit every month till you are dead. That is the end result.

Think about it for a minute. If you are between 40 and 60, and have a child with Multiple Sclerosis, the expenses associated with this disease can be much more than you imagine, especially as your child gets older or the disease progresses and requires much more care, are you ready to cover any unexpected expenses such as remodeling your home so your child can get around in a motorized wheelchair?

What about if you lived in a flood plain and the canal breaks wiping out your neighborhood and the insurance company is balking at paying for more than the cost to replace your home? Such as immediate relocation, working temporarily until you can return, replacing properties that were destroyed, etc…

Would it make more sense to dip into a $150,000 emergency fund than your retirement account?

Also it has to do with the way you think. You need to look ahead and increase your mind’s proportion of your net worth. The $150,000 emergency fund the little old lady kept was actually a small pitiful amount when in comparison to her net worth of 20 million dollars.

Bingo! That’s right, as long as you put away even just $100 a month for 40 years at 3% annual interest will net you at least $90,000 (results). Who knows, maybe 40 years from now, you may need a $10,000 insurance deductible because $1,000 just won’t cut it anymore if you want to save a couple bucks on your health insurance. Regardless, the point is there, whether you die tomorrow or 50 years from now, get into the habit of putting away a little bit every month till you are dead.

Editor’s Note : Being Profoundly Deaf, I want to apologize to any parent who has a child with MS, it is not a disease, just a medical condition. At one time, deafness was considered a disease. I have known MS friends over the years and it is not an easy condition to live with but I never saw them any different than anyone else, just like being deaf is no different than being hearing, we just can’t hear. A condition, not a disease. I am only using the term “disease” here for shock value.

The Strategy

I am not going to pretend and tell you I know exactly what my strategy is. Right now, all I can think of is to reach 6 months in my “emergency” savings account, plus a $1,000 deductible before opening up an “emergency” intermediate bond fund where I can continue contributing and simply sweep the dividends into the savings account.

Automate the Emergency

Regardless of what the emergency is, the key here is to remember to keep contributing to your emergency fund till you are dead. Make it automated, direct deposit or schedule a monthly transfer of $50 to whatever into a separate savings account where you can access your funds within 24 hours for a real emergency. Who knows? You may never have a need for it. You may end up having an emergency every 2 to 5 years. Whatever it is, the point is to make it automated. Keep going and going. If you have to dip into it, dip into it but keep going.

Reviewing the Emergency Fund

It is fairly obvious to me what some of the finer points are about having an emergency fund. In any case, I wanted to review them here to keep it simple.

1. Create a plan and be S.M.A.R.T. (Specific, Measurable, Actionable, Realistic, and Timely)
2. Include your monthly spending and insurance deductible amounts if any.
3. Keep your emergency fund separate from everything else and readily accessible. (Preferably where the power of compounding interest works in your favor)
4. Contribute to your emergency fund automatically every month until you are dead.

Tell me, what are your thoughts?

Technorati Tags: Personal Finance,Budgeting,Emergency Fund