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How an Emergeny Fund Can Save You Thousands Each Year!
By JLP | October 3, 2006
By now most of us know the importance of having an emergency fund. Having enough money set aside to cover 3 - 6 month’s worth of living expenses makes a lot of sense and can help put a person or family back on their feet should they experience something like a job loss or a naturual disaster. That said, it also makes sense to USE that emergency fund, which can help your monthly cashflow and help you build wealth by saving you thousands of dollars each year. How do we do this? Here’s two easy ways to use your emergency fund:
1. Stick it in a money market or high-interest savings account. On a $10,000 emergency fund at 5% interest, you could earn an additional $500 or more per year. (You would actually earn more than that due to compounding, but I wanted to keep the math simple.)
2. Raise the deductibles on your car and homeowner’s insurance. Earlier this year, I talked about how I adjusted my auto insurance and reduced by annual premium by nearly $500 per year. I bumped up our deductible to $1,000 from $500 and dropped comprehensive coverage on our old Honda Civic. You can also raise the deductible on your homeowner’s insurance. Check out the table below, which I put together with my homeowner’s insurance information:
Our deductible is based on the coverage for our dwelling, which is currently set at $180,000.
|
Deductible |
Deductible |
Annual |
Annual |
|
1% |
$1,800 |
$1,528 |
|
|
2% |
$3,600 |
$1,177 |
$351 |
|
3% |
$9,000 |
$827 |
$701 |
So, based on this information, if I had a large enough emergency fund, I could raise my deductible to 5%, and save myself $701 per year on my homeowner’s insurance premium.
In addition to the savings on the premiums, there’s also the hidden benefit of having a higher deductible in that you will be less likely need to file a claim. We all know that filing claims raises premiums.
So, adding it all up, we see that an emergency fund can potentially save a person nearly $1,700 per year ($500 earnings on e-fund + $498 saved on auto insurance + $701 saved on homeowner’s insurance = $1,699). That $1,700 invested in a Roth IRA at a 10% rate of return could potentially be worth nearly $100,000 in 20 years!
What are the disadvantages to doing this?
None as long as you have an emergency fund that is large enough to cover the deductibles. At the VERY LEAST, the emergency fund should equal all the deductibles. Ideally though, an emergency fund consisting of 3 - 6 months of living expenses is the way to go.
It’s true: the rich really do get richer!
Topics: Basics, Financial Planning, Insurance |
