One of the things I learned from my auditing professor, which I carry with me till this day, is the SYB Fund. Save your behind fund. He mentioned this as part of an ethics section where we were studying the Enron fiasco. His theory was this . . . if you are ever asked to book something and you know it is not right you give your notice and leave. Have this SYB fund set aside and if that time ever comes you don’t have to worry because you have money to live on. I didn’t know it at the time but he was describing an emergency fund. A full blown emergency fund.
Baby Step #3 – Save 3-6 months of expenses in your emergency fund
Why you should increase your fund
The initial emergency fund is just a beginner’s fund. Once your debt has been paid off you need to keep building up the emergency fund. This fund will come in handy in case you loose your job, have a medical emergency, etc. Should you ever need to tap into it for such emergencies you will save yourself stress and anxiety.
Look at your budget and figure out how much your expenses are monthly. I’m talking bare bones budget here. Take out the fun fund or any type of miscellaneous fund as these are not necessary expenses. List them all out (grocery, fuel, rent, utilities, etc.), add them together and times it by 3 or 6. Initially I saved enough for 3 months but due to recent activities at work (layoffs) I have now decided to up it to a 6 month fund. Obviously if you do loose your job you’re going to tighten up on expenses and this 6 month fund can easily be extended to a 7 to 8 month fund. You know all that money you were sending to your credit cards? Keep sending it except this time its going straight to your emergency fund! Keep building it up!
Baby Step 3b??
The Financial Peace University course lists an additional step where you in turn save for your house down payment. The rule of thumb is you want to have at least 20% of whatever your house is going to cost as a down payment. This will eliminate those pesky monthly mortgage insurance premiums (MIP). If I could go back and do this the right way I would probably build up my 6 month emergency fund then work on the house down payment. Or you can opt for a 3 month emergency fund, save for your down payment and then go back and increase to a 6 month fund. The point is you need that full emergency fund and if you are looking to buy a house you need that down payment. My monthly mortgage insurance premium was $34.19, that’s $410.28 a year that I was throwing away. I say was because I recently (last month) refinanced my home and no longer have these premiums. Just for fun . . . if I were to take those $410.28 and apply it directly to the principal on my home mortgage I would save $306.91 in interest on that one payment!!! I essentially threw away $2,051.40 (5 years of MIP)! That’s a lot of money when you factor in the interest savings. You see I always thought MIP’s were just natural, I had no idea you could get rid of that payment. I’m still learning as I go.
You’ve paid off your consumer debt, now it’s time to pay yourself. Save your money and feed that fund!