You Need a Real Emergency Fund

One of our 2008 financial goals was to increase our emergency fund from $8,000 to $18,000. I'm pleased to report that we have completed this goal and our emergency fund, which we keep at ING, is up to $18,000+. $18,000 is a lot of money, at least for us, to keep in a liquid form. And while we earn 3% on our emergency fund savings account at ING, we could earn more if we invested the money. Indeed, some experts suggest investing your cash and relying on a home equity line of credit or other line of credit for an emergency fund.

As The New York Times reports, banks are reducing or eliminating exisiting lines of credit due to dropping home values. A representative of WaMu explains:

“We will increase, decrease or suspend lines based on a number of factors, including a customer’s entire relationship with WaMu, their payment status and history, changes to their creditworthiness, and changes in the value of their property,” said Sara Gaugl, a Washington Mutual spokeswoman. “We believe this is part of being a responsible lender.” Home values are a particularly large component of the lender’s decision, Ms. Gaugl said, and since the real estate market remains moribund, more credit lines could be cut. “We will continue to evaluate individual home equity lines of credit in relationship to the amount of equity a customer has in their home,” she said, “and if appropriate, we’ll lower the line amount.”

If you don't already have an emergency fund, at least a mini-fund of $1000 - $3000, you need to start one.

1. Add funding your emergency savings account to your list of monthly bills and allocate $10, $25, $50 or $100 a month to your emergency fund.
2. Sell stuff at a garage sale on EBay or Craigslist. All proceeds go to your emergency fund.
3. Put your stimulus check or IRS refund towards your emergency fund.
4. If you did receive an IRS tax refund, talk to your HR department at work and adjust your withholdings so you take home more money in each paycheck. Put that extra money towards your emergency fund.
5. Cut back on the 'little' expenses that add up (i.e. lunch out, lattes, bar tabs, cigarettes, etc.) and you will be surprised at the money you can save. Put that money in your emergency fund.