Tag Archives: Automatic savings

The Benefits of an Emergency Fund

Stuff Happens
Unfortunately, bad stuff happens from time to time.  Your car breaks down, a medical emergency comes up, something on your home requires repair.  These problems rarely provide much notice and thus escape the usual process of budgeting and planning.  Instead, they present themselves (at the most inopportune time) as a large bill with little alternative but to pay.  Sometimes, the amount on the bill contains a comma.  Depending on your preparation, this can be either a nightmare or a small bump in the road.

By definition, these events are mostly out of your immediate control.  As such, you can only control how you prepare for them and how you react to them.  Creating an emergency fund (I keep mine at ING Direct) is a smart way to be ready for life when it hands you lemons.

What is an emergency fund?
An emergency fund is easy to understand but takes discipline to implement.  The concept is fairly self explanatory – it is an amount of cash that is spent only on emergencies.  There are two key parts to this definition:

  1. Cash – this implies that there is actual money in the bank, ready and waiting.  Over time, this can be built up by monthly contributions.  This requires that present consumption be reduced in exchange for future stability.
  2. Spent only on emergencies – a pile of cash sitting in the bank is tempting.  However, this fund cannot be squandered but used only for emergencies only.  And to be clear, that new pair of shoes or last minute trip to Vegas do not constitute emergencies.

Those stuck in a continuous cycle of debt often suffer from 1) overspending and 2) a lack of an emergency fund.  The overspending prevents debt reduction, while new spending and interest adds to the total.  Periodically, any break down / repair / large bill that occurs is paid with even more debt.  This destroys any progress made paying down the debt.  When a financial emergency arises, they are thrown back underwater, and the cycle repeats.

Benefits of an emergency fund
There are many benefits to having an emergency fund.  Most share the common theme of ensuring future stability, which comes in many forms.

At its simplest, an emergency fund is a way of forced savings.  Each month, you contribute money until you reach your target amount.  Instead of spending, you are saving.  Instead of sending money out the door, you are putting money in the bank.  The confidence and peace of mind that comes with being able to handle financial emergencies is invaluable.  For those serious about their finances, this is the first step to ensure stability and safety.

An emergency fund can also protect you from unemployment.  If your job is your primary source of income, it will be very difficult to pay your living expenses if your job vanished tomorrow.  The better alternative is to have savings in the bank that allow you to live comfortably for a time while searching for a new job.  This would involve having a few month’s worth of living expenses saved, just in case.

Emergency fund strategies
There are various theories about how to construct your emergency fund.  While the end result is an amount of money you keep in the bank, the deciding factors are critical as they force you to think.  For example, in developing your own emergency fund, relevant questions may include:

  • What financial risks exist (car repair, health care deductible, etc.)?
  • Who are my dependents?
  • What are my monthly expenses?
  • How secure and stable is my income?
  • What amount of money do I need to be comfortable/safe?
  • What other investments/assets do I have?

Since every situation is unique, emergency funds vary in size.  They can range from a few hundred dollars to over a year’s salary.  I think somewhere in between is a happy medium.  You want to be able to cover any of your deductibles without problem.  Often times, you will hear these figures quoted in terms of living expenses.  For example, I want to have 3 months living expenses in my emergency fund.  This would cover a temporary job loss and provide a nice cushion of cash reserves.

Some may counter, “I could never save that much money”.  My question to them is, “What do you spend your money on?”  Each month, we make choices about where our money goes.  It is up to us to insure that our desired future is aligned with today’s actions.

Setting a goal and taking action
After considering your own situation in terms of the criteria above, you can create an emergency fund by taking the following actions:

  1. Define your goal – This depends on your situation, and it can have multiple stages.  For example, my immediate goal is to have $1k in my emergency fund (completed June 2012).  My longer term goal is to have 3 months living expenses in the bank, which is around $4k.
  2. Create an account – You can use any bank account for your emergency fund.  I do not recommend keeping in your checking account (or under your mattress!) as it is too easy to spend.  Instead, a free ING Direct account is great as it segregates the emergency fund, which makes it ‘official’.  This also creates a barrier so I am not tempted to pull from it, although it is there if I need it.  These accounts pay good interest and I enjoy their handy sub account feature.
  3. Automatic contributions – Using my ING Direct account, I created an automatic contribution that occurs towards the end of each month.  This automatically transfers money from my checking account, and I don’t have to worry about it or remember it.  It also prevents me from ‘forgetting’ to transfer the money.  Savings and automation are key.

Best of all, this is something you can do in the next 15 minutes.  Create an account, setup automatic contributions, and you are well on your way to a more stable financial future.


My HSA Goals (June 2012)

I am a big believer in setting goals and taking action that move you toward those goals.   Goals align your future with your current actions.  They provide an incentive and guide for how you spend your time and resources.

To provide some background, my main financial goal right now is to be debt free, and my target date is April 2013.  I have 3 months left on student loans, as well as around $8k on a car loan.  My current actions involve paying more than the monthly payment while cutting back on other spending.  As soon as my student loan is paid, I will snowball that amount into the monthly car loan.  Once that loan is paid, I will snowball that same amount into savings and investments.  Hopefully in the meantime, I can increase my income.

HSA Goals
After purposefully signing up for an HSA enabled HDHP, I was slow to actually open the account (to the tune of 6 months!).  I finally researched how simple it was to open an HSA and how well it fit my situation.  I then took action by opening an account and integrating HSA contributions into my financial plan.

As I continue to fund my HSA month after month, I have developed the following goals to keep me on track, listed in order of ease:

  • Save an HSA balance that covers 6 months of insurance premiums – I am nearly there on this one, with a current balance of $1k+.  This provides piece of mind for an unexpected unemployment.
  • Build up unreimbursed QME– paying for qualified medical expenses out of pocket builds up unreimbursed QME credits, which you can withdraw from your HSA to pay yourself back.  This is a backup emergency fund, and by paying QME out of pocket, I increase this line of cash that I can tap if needed.  It also protects my HSA in order to let it compound and grow.
  • Cover my deductible – Heaven forbid I ever have a medical emergency, it would be great to have my entire deductible in my HSA at my disposal.
  •  Max out my HSA each year – The maximum contribution for HSA accounts is $3,100, which equates to a monthly contribution of $258.  Currently, I am only contributing $160 per month.  I would like to increase this to $200 per month.  As I am tracking lower than the max, I may make a catch up contribution towards the end of this year if I have some cash lying around.
  • Invest my HSA – Given my views on health care and the advantages of an HSA, I want to be in the HSA for the long term.  Soon, I will break off part of my HSA and invest it via a brokerage, with a time horizon of 30-40 years.  In the end, this will be a nest egg for health expenses, or if I am fortunate, to supplement my retirement.

In order to achieve these goals, I am taking the following actions:

  • Automated Savings – I have automatic contributions established for both my HSA and emergency fund. This takes the work (and ‘forgetting’) out of saving and keeps me on track every month.
  • Pay QME out of pocket – Using my monthly budget, I try to pay nearly all of my QME out of pocket.  This allows my HSA to grow while providing me the benefit of tax-free reimbursement in the future.
  • Investment Planning – I am a little ways off from being comfortable investing my HSA.  However, that day is drawing nearer.  To prepare for this, I am considering my risk tolerance for this account.  How much do I want to keep liquid, how much should I invest, and how much risk am I comfortable?  After deciding this, I will determine an asset allocation for my HSA, or what investments I will purchase.

Obviously, health care comes first and attending to any sickness / emergencies that arise is goal #1.  Remember, health is true wealth.  Beyond that, I follow these goals to provide some financial soundness to protect my health in the future.

Pay Yourself First – HSA Contribution Automation

A successful long term saving and investment plan requires that goals be both made and acted upon.

The Goal

For a health savings account, the goal is easy – to amass as much of a safety net (or nest egg) as possible to cover future medical costs (or retirement).  Instead a monthly liability, your health care can become an asset that keeps on growing.

This goal is even more appealing when considering the advantages provided by an HSA.  For one, you can save (and invest!) money instead of throwing it away each month on premiums.  That money sits in your HSA account, just like a bank, and is yours forever.  HSA contributions also lower your taxable income.  They can be used to purchase all sorts of non-traditional medical products and services.

In today’s uncertain health care environment, more people are deciding that their goal is to take their health care into their own hands with an HSA.


Acting upon your goal requires discipline and sacrifice.  For establishing an HSA, these actions can be summarized in three steps:

  1. Insure – sign up for a High Deductible Health Plan (HDHP) that is HSA compatible.
  2. Open – open an HSA account with a registered HSA custodian.  I recommend HSA Bank.
  3. Fund – contribute to the HSA account

Insuring yourself is a given.  Opening an HSA account is simple and can be done in 5 minutes.

Funding the HSA is the hardest step as this is where you ‘part’ with your hard earned dollars each month.  Of course, the dollars you contribute are yours until you spend them.

(I procrastinated waited for six months until I began funding my HSA! At my contribution rate, this would equal an additional $960 in my account.)

Setting up an automatic monthly HSA contribution is the easiest way to reach your goal.  Being automatic, you will factor this monthly investment into your budget.  There is no need to remember to transfer the savings each month – it just happens.  It is also more difficult to weasel out and not make the transfer.

When you start out, any amount you can afford is a good amount to begin with. Even starting small at $25 or $50 per month will add up quickly.  I remember looking at my account balance once it hit the $1,000 mark and realizing that this was real money. It is a great feeling to have this kind of protection and security in the bank.  My next goal is to have my deductible fully funded in my HSA.  I would also like to contribute the 2012 maximum of $3,100 to the HSA.

Your HSA administrator will have an option where you can create an automatic, monthly transfer from your primary bank that repeats on the day you choose.  It is very easy to set up and monitor. I set my transfer near the end of the month as it makes the most sense for my biweekly pay period.  Most of my expenses occur at the beginning of the month.  Take a minute, analyze your finances and set up an automatic contribution.  Start moving towards your goals.