Saving, or, pay yourself first

One thing that it seems few Americans do is put aside some money each month for a rainy day, or what Dave Ramsey would call “an emergency fund.” It’s hard to do when living paycheck to paycheck. The first step is probably the toughest, which is to live on less than a full month’s pay. A monthly spending plan can help with this immensely.

Once you see everything, I mean absolutely everything, laid out like that, you can see where you can cut back. Or, you can see that you need a part-time job to be able to save that emergency fund. Dave Ramsey recommends pizza delivery, but I also know people who write book reviews or do secret shopping in order to make a few extra bucks a month.

All our saving is done with ING savings accounts labeled for their various needs (like when we were saving for a new vehicle, we had “New Car” and “Emergency Fund” accounts). ING makes it easy to set up recurring deposits, and since there’s a delay when transferring money back to a checking account, it makes you think twice about spending money that isn’t immediately available.

Interest rates on traditional savings accounts right now are poor, but taking that money out of an account where it’s easy to spend and moving it to an account where it’s more difficult to spend sets up a psychological barrier to blowing all our hard-earned money. Also, since I still get to see that money via our Mint.com account, I get to enjoy seeing one category (regular spending) be in the positive instead of the negative (student loans).

High-yield savings accounts or money market accounts are another option for a better rate of return, as are CDs (though CD rates are also low right now). The high-yield accounts usually have a minimum deposit, like $5K, so right now, that’s not an option for us while we aggressively–and I mean, really aggressively–pay off debt.

But here’s where I disagree with Dave Ramsey a bit. He says to take all your savings (if you’ve got any beyond $1,000) and throw that toward debt. I’m not comfortable only having a $1K emergency fund, especially with higher medical insurance deductibles and the likelihood of us moving within the next year (damage deposit and paying rent on two places in one month in order to move slowly is a big ouch!). I think the amount in the emergency fund should be comfortable for the individual family; for most, I’d guess that’s going to be 3 months income/expenses, which could be over $10K for some families, and less than $3K for others.

What do you think? Do you have an emergency fund? Do you feel, like Dave Ramsey does, that having a fund wards off Murphy?

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