She Said: 

That’s it!  Excuse me while I make this phone call.  Forgive me if I am emotional at this moment.  You see, I must find the number to call and put a picture of our missing savings account on the back of the milk carton. 

It all started back in November when five major emergencies blackmailed us.  We responded in fear and ignored the cardinal rule of not negotiating with bad guys.  The once robust and healthy savings account broke down into pieces and ran away. 

Now it is time to rebuild our relationship with the Savings Account.  But in the middle of this bad breakup with debt (I even used the “it’s not you, it’s me” line), do we even want to find a savings account now?  What would be the reason to start a relationship with a new one?  The return of interest is so low.  And the two-timing relationship with the debts is really exhausting and dang are they so demanding with their interest sometimes being twenty times more!  Are savings accounts like wearing your jeans from the 80’s with the cuffs folded and rolled up?  If I call him back, I am simply being nostalgic?

I remember when my father first introduced me to a savings account on a blind date.  My father was the chaperone as I was just a young pony-tail girl with a full plastic piggy bank.  But it was love at first sight upon the first introduction to the soft leather blue book.  And it even got the spelling of my name right on the inside too!

Overtime our relationship grew as we both contributed our various earnings.  At one time I asked my father why the savings account worked long hours at the bank and he explained that the savings account assured that others could be helped in reaching their goals and dreams.  In my college years the savings account was my biggest cheerleader as it purchased my textbooks, meal plan, and even my first desktop computer.

But now the steady savings account has been hurt by the economy and can only provide a less than 1 percent return.  In the meantime, bad boy Visa roars into town on his Harley to dangle shiny promises of fun and trinkets in front of you.  Yes, he may get grouchy and demand 25.9 percent interest each month, but what relationship is perfect?!?

In fact, in 30 days, on my $1,000, the savings account would only be able to bring $5.01 to the table.  And one year later, even with accumulation, savings account can only give you an additional $51.05.  But during this same 30 day period, the same $1,000 thrown into the face of Visa (in addition to the minimum payment) would pay down $1,345 on the principle.  And in ripple effect this $1,000 payment alone helps me shorten our relationship from 41 to 37 months AND save me $1,752.30 in interest paid at the end.

We all say that in a relationship looks do not matter.  But honestly, when both of these suitors are standing on your doorstep, which one is going to look visually more appealing?

But then an emergency happens.  Who is going to be more caring?  Bad boy Visa with his 25.9 percent demand with maybe a couple of additional fees too?  Or Steady Savings Account with his consistent hard work and asks nothing in return from you when you make the withdrawal?

So now I need $1,000 for the emergency.  From Savings Account he will happily hand over the $1,000 and wait patiently for me to return and I am only out $5.00 for every month I do not repay the $1,000.    In the same situation, Bad Boy Visa would be swiped and every month that I do not pay it back, I would only have to pay about a minimum of $22.00 in the first few months   But with only minimum payments, it will take 78 more payment (or 6 ½ years) to pay off the remaining balance.  And by this time I have also paid an additional $1,031 in interest – all for the so-call convenient relationship. 

In short, savings account provides something that no charge account can give you, a sense of security that when life throws you a few curves you will be taken care of and be asked for nothing in return.  By like any relationship to work you have to make it a priority!! 

He Said:

So, apparently we are in a relationship with our savings account…very interesting, right?  I guess my job is to tell you that, in this relationship, size really does matter.  But how big should you go while also trying to pay down the debt blackmail?

Absolutely there is a need for a savings account to make sure money is available when those emergencies come up.  Because, as my lovely wife pointed out, if you get blackmailed by cars breaking down, furnaces becoming fussy, or just money running short at the end of a pay period, you cannot do what we have done for years, which is rely on the shiny plastic in your wallet or purse to pick up that slack.

For this blog post, especially given where we are with our finances, we are not talking about a fully funded emergency account that can cover you during a job-loss situation, or if a loved one is lost.  This is a smaller emergency account to cover expenses when things go wrong.  You build this first, before starting to pay down the credit card and other revolving accounts, and it is supposed to be a life raft when smaller things go wrong.  The experts all agree you should have this account, but I disagree with how much you should put into it.

Now, the “experts” say that you should have an emergency fund of $1,000 set aside before doing anything else to tackle your debt.  That money is set aside for when the car breaks down, the pet eats your wedding ring, or when aliens arrive from the planet of Pluto (yes, it’s still a planet as far as this blog is concerned) and put a huge hole in your roof.  In the past, we have always tried to keep the prescribed $1,000 in the emergency account, but, as with the examples in November, that amount might not be enough.  Because it’s never JUST the roof, or a car breaking down or emergency pet surgery…it’s all three rolled-up into one, crazy month.

So, size does matter and that is determined by a number of factors:

1. Age or reliability of your vehicles, heater or air conditioner in the house, or other appliances in which you depend on.  The older or more unreliable they are, the more you need.  One of our vehicles constantly has something wrong with it, and it spends as much time in the shop as it does on the road.  The average repair for it has been around $1,300.  So, the standard $1,000 emergency account does not cover it and it is really hard to get the shop to release your vehicle when you are short $300.  These shops don’t have dishes for you to wash to make up the differences, nor are they interested in you building a website for them.
2. The size of your deductibles – medical or auto insurance.  To save money on auto insurance, we bumped up our deductible to $1,000.  So, if something does happen and State Farm comes to the rescue, your emergency fund is now gone.  A lot of medical insurance plans have a $1,000 deductible per patient per calendar year.  One trip to the emergency room, especially if they have to use some of that fancy equipment, you are looking at a decent size bill.  Now, hospitals and such are willing to negotiate a lot more than others, so you have a lot options to not have to pay that bill right on the spot.
3. The availability of funds to replenish the account.  Once we get into the mode of paying off the credit cards, we really don’t want to break the cycle for a couple of months because we have to replenish the emergency account.  It has been more rewarding to over-build the account at first and then tackle the credit cards.
4. If you are going to run a very tight, strict budget, having extra cash in the emergency account to cover if the budget goes bust is very helpful.  I have been doing monthly budgets for a few years now and there are always a couple of months where the math just does not work out.  I feel a lot better about being aggressive knowing I have money backing me up if my eyes are bigger than my stomach.  Or my stomach was bigger than my eyes.  Or something was bigger than something else which caused something to go over…uh…you get my point.

Since we hit all three categories, we are now aiming for an emergency fund of $2,000, but average more around the $1,500 mark.  Currently, the account has about $24.00 in it and we’ll have to replenish it quickly before I start feeling better about letting the family outside the house without supervision.  When the emergency account is that low, I get super paranoid…kicking the tires on the car, changing the filter on the air conditioner, etc.  I realize most of these emergencies that come up are out of my control, but without that safety blanket of the emergency account, I just don’t feel equipped to handle the next problem that comes along.

There will be other blog posts around this very topic, but we are cleaning up some of our living furniture to put it on Craigslist in order to build our savings account back up.  If anyone is interested in a slightly used leather couch, overstuffed chair and foot stool, come on down and help me rebuild this account back up.  Or, as my wife would probably write it, establish a relationship with our finicky low-percentage yielding partner???

You say: 

Do you think it is more important to establish this savings account or just start paying off debt as soon as possible?  What emergencies in the past have been thwarted because you have had an emergency savings account?