When did Noah build the Ark? Before the rain, before the rain. That was where I was starting from when I sat down with a friend and his wife recently to talk about money. As I laid out the idea of having 3-6 months of living expenses set aside they both stared back at me and for a moment I felt my age. Their look said it all, “Hang on old man, we are young, have good jobs, and are both healthy. Three months seems a bit much.” My mind flashed back to when I was their age and remembered at that time in my life what I considered an emergency was missing Happy Hour. Funny how age changes your perceptions. They had asked my opinion on where they should start with their money and a good rainy day fund is usually tops on my list.
Before the rain, before the rain. I gave them the Noah analogy and some more “what ifs”. After some thought they settled on trying to establish a two month emergency fund. I encouraged them to pile up some dough as quickly as possible, push it into an online savings account and let the current 5% interest rate help them along. Then they could add a little every month to keep it growing towards the six months of expenses target. They agreed. If you are going to go then go full speed.
Noah didn’t just start the Ark he actually got it FINSHED before the rain. Their plan of attack is simple in its approach. Cut the cable movie channels, cut back on eating out, and start taking lunch to work more. They are also putting some shopping on hold (new houses need new things, but not all at the same time.) and he is picking up extra duties at work. (I think picking up extra hours or duties at work is a great idea. If that is not possible a second job for a few months is another possibility to help build quicker. A good garage sale, in warm weather, can pull in some cash also. ) The whole point I tried to make to them was get some cash on hand before something happens and you have to reach for the plastic.
If you stand outside in the country you can actually smell the rain coming. Now some of you may be thinking the same thing as my friends started out thinking, “I have plenty of room on my credit cards for almost any emergency.” “You don’t understand the bank has already set us up with a home equity line of credit in case something happens.” My response was and is this. Let’s say an emergency comes up so you throw it on the credit card and move on. You now have a NEW payment next month. Doubtful you can pay it in full next month because there’s not enough slack in the budget. If there were you would have used that slack instead of the credit cards. Now you are paying interest on an emergency. (The phrase kick him while he’s down ring any bells?) In a couple of months something else happens, car tires, refrigerator goes out, deductible for x-rays from rolling an ankle during a pickup game of basketball (no wait that last one was me). The point is now you have ANOTHER NEW PAYMENT. As you can imagine it doesn’t take but a few small emergencies before the budget is worthless and you are waist deep in water. Nervous1 summed it best on a thread over on the MSN Money boards, “Your $0 dollar emergency fund will be more than sufficient to cover any $0 dollar emergency you have.” Putting emergencies on credit (cards or home loan) would be like Noah building and someone coming right behind him pulling out every other nail. Get the rainy day fund finished and the emergencies will be more like rough seas then someone trying to drown you. Good luck with your building.
I see my friend all the time so I know how they are doing, drop me an
e-mail or post a comment and let me know how YOUR rainy day fund is coming along.
That’s it for today. Here’s to being prepared and to keeping an eye on your EveryDay Money.