Give It To Me Straight!

Dear HomeDingo,

Lately my husband and I have been fighting a lot more about money.  I guess that’s no surprise during these hard times.  I feel we are lucky, because right now both of us hold decent jobs, but there are no guarantees.  One or both of us could be laid off tomorrow.  We manage to pay our bills and still have a little bit left over at the end of every month.  It isn’t much, but it’s always been enough to go out to dinner a couple of times a month, or buy something a little extra for the house now and then.

I have been getting a lot more cautious about finances during the past year.  The economy seems to be getting worse, not better, and I don’t want to be caught off guard if one of us loses our jobs and our income drops off.  We don’t have a lot in savings right now, which is one reason we are holding off having a baby.  We bought our house last spring, and I have felt strongly that we should be saving some money for a rainy day – build up a little in reserve so we can keep paying the mortgage until we find another job.

The problem is my husband doesn’t like the idea of giving up his little pleasures like eating out once in awhile, or buying some of his grown-up toys.

Am I being selfish by insisting that we cut out all spending that isn’t absolutely necessary, and put that money aside if we need it to live on someday?

Chelsea,

Huntsville, AL

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Hi Chelsea,

You are absolutely right to start an emergency fund.  In fact, an emergency fund is so important, I classify it as the sixth of Seven Keys to Home Affordability in my soon-to-be-published home buyers book.

If you had no choice but to deplete your savings to buy a home, you should start funding a cash reserve the week after closing. Putting $50 from every paycheck into an account earmarked for emergencies is better than doing nothing. When you start your fund, define “emergency,” and make no exceptions. Coming up $200 short for your annual golf weekend to the Outer Banks is no reason to raid a crisis fund. Skip the trip, at least this year. Allowable withdrawals can include payments for living expenses after a job loss or business failure. Other legitimate purposes of an Emergency Fund include one-time payments for automobile repairs, home repairs, replacing broken appliances, unexpected tax bills, and illness or accident not covered by insurance. Add to these your own Emergency Fund uses, just keep your definition narrow.

How much to build up and maintain in reserve depends on your circumstances and the broader economy. If you work for a company or hold a job on the endangered species list, set aside six to nine months of living expenses. During a recession, when jobs are scarce, boost your reserves high enough to keep your household going for one year. That buys you time to re-tool your skills if you must change careers.

Do not keep your Emergency Fund in cash under a mattress. Put your money in a savings or money market account. Avoid certificates of deposit, unless they waive fees and penalties for early withdrawal. Volatile equities funds are also off limits. After all, the benefit of a back-up fund is knowing your money—all of it—will be there when you need it. Whatever institution holds your Emergency Fund, make sure they won’t give you a song and dance if you need to withdraw a large sum. I hate banks that make you feel like you’re committing a crime when you ask for your own money back.

Chelsea, between you and your husband, is sounds like YOU’RE the one with common sense and financial self-control.  Tell your husband to stop giving you a hard time about creating an emergency fund.  Building an emergency fund after buying a home is absolutely the right thing to do.

Sal at HomeDingo

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