One fine spring day, as I was making the journey to work, a huge, monstrous rock flew out of a truck, and hit my windshield. How the windshield stayed together is beyond me, but no matter how I looked at it, it needed to be replaced.
That stuff happens.
Let’s imagine you’ve been working at a job for a year. You are busting your hiney, trying to prove yourself to your boss and making excellent professional progress.
You go into work on Monday and your boss calls you into her (–> see what I did there? 🙂 ) office saying, “this is hard for me to do. You’ve been a great asset to the team and have really helped us increase profit, but unfortunately our financials are not looking better and we are going to have to reduce our team size. Please pack up your belongings… blah blah blah.”
You’ve officially been canned.
Besides the emotional stress of wondering “what if I had…” there is likely going to be HUGE, nasty, hairy, financial implications.
Not only is the situation crappy, but your bill collectors, landlord, and Aunt Sallie Mae are not going to be sympathetic to your newfound troubles.
You are experiencing a drastic rainy day.
Hopefully the video gave you some good insight as to what an “Oh Sh*t Fund,” more delicately known as an Emergency Fund, can do for you.
When you are prepared for a rainy day, two magical things happen:
1. You don’t really have many rainy days.
2. You sleep better at night.
To recap on the video:
You will have crappy things happen to you.
It’s one of the 3 certainties of life: death, taxes, and crappy things happening. Like the video highlighted, my poor little sister had emergency surgery within 24 hours. That was extremely unplanned- but she had an emergency fund to help her pay her bills and focus on what she needed at that moment…getting better.
This fund will prevent you from going into debt when crappy things happen. Can you imagine a worse situation than losing your job, not having saving and funding your life with credit cards? When you get back on your feet you would have a HUGE mess to clean up. But not the case if you have an Oh Sh*t Fund.
You need 6 months in the bank.
The next logical question is typically, “do I need 6 months of monthly income? ” Nope. You only need 6 months of living expenses. Look at your monthly expenses and reduce them down to the bare minimum. Essentials only. No, cable does not count as being part of the bare minimum. Neither does eating out. We are talking the absolute necessities- get rid of the rest.
Once you have dwindled that number down, multiply it by 6 and that is how much you need for rainy days.
You don’t have to keep your fund under the mattress.
Where to keep your fund is a great question! I personally have a pretty sweet deal going on with my bank. I’ve been with the same bank since I was in high school (yep, only 1 year 😉 ) and they offer a rewards program. This is connected to my checking account. I earn 1% interest on my checking account. The interest on my checking is automatically transferred to my saving account earmarked Emergency Fund. The savings account earns .49% interest. I’m earning interest on my interest.
The goal is not to make a lot of money with this account, but heck- if you can land a sweet deal like I did, you will make a little bit AND the fund is very liquid. Remember, liquidity is how quickly you can convert the money to cash. Houses = not very liquid. Cash in hand= most liquid.
If you choose to try and make a small amount of money on your emergency fund (by small- we are talking less than $100 a year) and want to consider a CD there are a couple things you should know:
1. The shorter the term, the smaller than interest.
2. Be sure that you understand the penalties associated with early withdrawal. Sometimes, banks will simply say you lost all your interest earned, and sometimes they will charge a penalty. Find out which it is. It’s okay to lose your interest, it’s not okay to pay to access your money when you need it the most.
There you have it. My thoughts and advice on Oh Sh*t Funds. As always, thank you for reading and helping this business grow! The past few months have been unreal and I have you to thank.
Every time you share these posts, you are directly helping me change the world through personal finance!