This is timely information consider I wrote this morning about establishing a small emergency fund before taking on the task of accelerating debt payoff. Last week, Liz Pulliam Weston from MSN Money provided details from a summary of different savings studies over the past few years. I discovered this article today.
According to the survey results, having just $500 in the bank corresponded to a large difference in stress, quality of sleep, quality of health, and productivity. The study also shows that income level has nothing to do with this. In both low and moderate income households, the average income for households who have saved at least $500 were about the same as the income for those who had not.
Better health and greater productivity save money in the long run. Even if it doesn’t sound like a good idea to start an emergency fund before directing all of your excess income towards paying off debt on the surface thanks to evaporating savings interest rates, there are many ways a small cash cushion can pay off in the long run.
Want to sleep better? Save $500, Liz Pulliam Weston, MSN Money, March 12, 2009.
Understanding the Emergency Savings Needs of Low and Moderate Income Households [pdf], Stephen Brobeck, Consumerism Federation of America, November 2008.
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{ 6 comments… read them below or add one }
How much should we have in our emergency fund? My friend told me 2 months worth of rent? Is that optimal? What about other costs and whatnot?
The most common advice I hear is three to six months’ worth of all expenses. Rent, essential utilities, food, and transportation all count. I’d suggest having even more if possible when the job market is bad in your industry. You might want to check the results of this poll I took last year in combination with this article about the right size for your emergency fund.
I’ve read some good advice from others that I think is sound: Money Priority #1 should be having $1000 emergency fund.
Following that, the precise order of other money priorities are debatable and may vary case by case: paying down debt, funding a Roth IRA, saving more of an emergency fund up to the 3-6 month recommendations, etc. But that first $1000 (or $500 according to the study referenced here) is a comforting and paramount first step.
This is one of those issues where human personality traits have to take precedence; even if the mathematical ideal process is to pay off high-interest debt first, the mental benefits are important and must be reconciled.
I will second this one. We’re sitting on a huge pile of cash right now because of our wedding/down payment efforts and the feeling that pile gives us is like nothing else. We could both lose our jobs tomorrow and, while it would suck, it wouldn’t be the end of the world.
We so often forget that there mental and emotional components to our money as well. A little peace of mind is often worth a little more interest to establish an emergency fund first.