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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
Amount ($)

Annual
Premium

Annual
Savings
*

1%

$1,800

$1,528

2%

$3,600

$1,177

$351

3%

$9,000

$827

$701

*Annual savings calculated based on the original premium of $1,528.

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 | 7 Comments »


7 Responses to “How an Emergeny Fund Can Save You Thousands Each Year!”

  1. samerwriter Says:
    October 3rd, 2006 at 2:56 pm

    Great article. I keep thinking I should review all my insurance policies, but just haven’t gotten around to it (for about three years now…).

    Seeing the potential savings drives home the urgency :)

  2. Blazer86 Says:
    October 3rd, 2006 at 5:44 pm

    Great analysis. I finally got around to doing this last spring. We already had our car insurance rates at pretty high level, but raised deductible on our homeowners, put 80% of the savings into a personal liability umbrella so my assets aren’t at risk if something really bad happens. We ended up money ahead AND I sleep better knowing I’ve got the $$ if something goes wrong…which it just did. We had a plumbing emergency today which is no doubt going to cost us $200-300 to fix, but we’ve already earned more than that in interest on the money in the emergency fund, so by my (admittedly silly) math, fixing the plumbing is FREE!

  3. Juston Garland Says:
    October 4th, 2006 at 6:39 pm

    We can see the benefits of having an emergency fund set aside for ourselves, and are glad you was able to save big money. The real problem most people have is saving enough money to reach that point. A lot of Americans live paycheck to paycheck and find it very difficult to get ahead. I think you should start out very small maybe $25-$50 dollars per paycheck and pay yourself first. I know some bills may arive and you need to pay that in order to avoid disconnection, but don’t let that stop you. Pay yourself before you pay the bills, this will be one of the most important steps in reaching your goal. Please don’t let your main bills get disconnected like rent, water, or electric just bills you can do without. You may want to consider setting up a savings account with a safe and secure bank like http://www.ing.com. There you can connect the account to your current bank, and make easy transfers or you can have them deduct the amount and put it into your savings account for you. A bank like ing is always very competetive when it comes to high interest rate savings account and you can have the money fast if you ever need it without leaving home. Most big banks I have found seem to be offering low interest rates on money market accounts and withdraw the interest you have earned wile making a withdraw and you may even have to take out a 10% penalty for taking out early. These accounts can be good and not avoided, just learn about them before you jump into one. After setting your account and building it slowly you will find you have more money and can reach your goal of savings for the emergency fund every American should have.

  4. And You Retire » Six Random Links: October 5, 2006 Says:
    October 5th, 2006 at 4:46 am

    […] (1) How an Emergeny Fund Can Save You Thousands Each Year! – allthingsfinancialblog.com […]

  5. NCN Says:
    October 6th, 2006 at 10:32 am

    All Financial Matters,
    Great, great post. I love it when analysis and common sense go hand in hand…

    Your blog is awesome,
    NCN

    This comment is part of my “100 Comments Series” over at No Credit Needed.

  6. Silicon Valley Blog About Money, Finance, Geek Culture and Cyberspace Says:
    November 10th, 2006 at 10:39 am

    […] To be prepared and anticipate the twists and turns of outrageous fortune. This is what an emergency fund is all about: don’t get caught with your knickers down! […]

  7. Debt Blitzkrieg » Blog Archive » How about that emergency fund? Says:
    March 28th, 2007 at 2:35 am

    […] MORE READING Get an Emergency Fund Now! How to Create an Emergency Fund How an Emergeny Fund Can Save You Thousands Each Year! Emergency Funds: How and Why You Should Get Started Right Now Automate Your Emergency Savings How I Plan To STAY Out Of Debt Non-Millionaire’s Guide to Retirement […]

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