Safety First Emergency fund

Like they say in construction “Safety first”. Basically it’s an emergency fund but I like to call it safety first fund. This safety fund is your lines of defense, basically like your steel toes boots, safety gloves, and safety goggles. This will help protect you from dropping a hammer on your foot, Ouch! Metal chipping flying and hitting your eyes. This is the same concept for the safety first emergency fund. Having some line of defense will help minimize going into further debt because of unexpected events.

We need to prepare ourselves from unexpected events like job losses, pregnancy, natural disaster, and medical emergency. If any of these events occurs would you be able to financially sustain and support yourselves and families? Building your line of defense is important to prepare you for this type of events. Having a safety first fund will help keep you a float paying necessary bills like mortgage, food, gas, and etc, until you can get back on your feet and work again. The only reason you should use it is for “EMERGENCY ONLY”. So many people talk about having a safety fund, but tend to dip in it every time they want to buy something. Another excuse may be that they do not make enough money are after I pay all my bills I do not have any left over. Remember you need to control yourselves and not tap into it unless it is an emergency.

What’s the rule of thumb?

The rule of thumb is between 3-12 month of your expenses should be sufficient. I have a 12 month safety fund, but everyone situation will be different, aim for 12 month if you can. You do not want to rely on credit card for your emergency fund, with the high interest rate it’s not worth it unless you can pay it off completely every month. You can start by saving small and increasing it every so month depends on your situation. You can start $25 monthly or bi weekly if you can, then start increasing it. Talk to your HR and have them automate your saving by having them take it out every paycheck. Remember slow and steady win the race, it’s better to start small if your budget is tight, eventually your safety first fund will accumulate with time.

Where should I keep my safety first fund at?

You should keep your money in a saving account or anywhere that is liquid. Remember you’re not trying to chase huge return here so don’t try to put it in the market. The key is to keep it liquid that way when you need it you can just transfer it. There are many online saving accounts that pay decent interest rate also. Check out to find a reputable saving account and remember to look at any associated fees that some company may be charging. Most of the online saving account has low fee and minimum because they don’t have local branches like banks so they tend to have low fees. Having your saving account in a bank can come with high maintenance fee and a certain minimum fund you have to keep to maintain your account. Remember to look for FDIC (Federal Deposit Insurance Corp) saving accounts, that way if the bank goes under you’re insured up to $250,000.

I hope I convinced you to think safety first, because you’ll never know what will happen to you tomorrow. Knowing that you have a safety fund will give you a peace of mind. You can also focus more on socking more into your retirement account.

Do you have a safety fund already?

Do you find it hard to fund your safety fund?

How many month of expense can you cover?

Let me know your thoughts and ideas.

Building a Financial Foundation

Think of building a concrete foundation for a house. Without proper mixture in concrete the concrete will become weak and eventually crack. This is the same concept of building a foundation for your finances. We need strong support pillar in order to have comfortable lives. How do we do that? There is several ways.

Budgeting – How much are you spending & earning? Write down every dollar you spend that way you can develop a habit to track your money. I recommend trimming any unnecessary expense; do you eat out for lunch often? Brown bag your lunch, instead of driving, try biking or walking depends on your location. Look for bundle package deal for entertainment like your internet, television, and phone. Make sure you’re not spending more then you make.

Debts – Having tons of debt will be a setback, find ways to trim expense and add more to your payment. Student loan can be both good and bad. Although it can further your education it can also leave you in a position drowning with debt. Search for marketable skills that will be useful and have employment growth. Only you can decide if it’s worth going for a major that is in demand or going for a major of your passion.  Pay off credit card if you have high interest rate. It does not make sense if you have a credit card bill with a interest rate of 6%+  and also putting money in an saving account earning less than 1%.

Emergency Fund – Consider opening a saving account for emergency enough for 3 – 6 month. This will be your last resort fund, and should not be touch unless you absolutely need it. Like for car repairs, medical emergency, and etc.

Retirement account – Do take advantage of your employer company 401k, you should contribute enough to get your company match. If you have excess money you can contribute up to the max $17,500 for 2014. If you still have more left over consider opening a Roth/IRA account the max you can put is $5,500 for 2014 and will vary between your incomes. Check with your tax advisor to see if you are eligible for Roth there is an income limit on an ROTH IRA.

Investing – If you still have money left over consider investing in index funds. I advise not to invest in individual stock it is too volatile, you can try if you would like but only invest in a certain amount that you’re willing to lose. I prefer investing in Vanguard due to their low cost index fund, but there are several other companies you can go with. I recommend figuring out an asset allocation like 80% stock and 20% bond, depends on your comfort zone.

By taking these small steps you can build a strong foundation, that way when you have several small cracks you can weather the storm.