Save your 'emergency fund' for the real thing

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money, and join the discussion on the Women in Red message board.

Like many people, I used to claim that I had an emergency fund. But to be honest, most of the time it was more emergency than fund.

That's because, unbeknownst to myself, I had made all the classic first-time mistakes:

• I set it up in a savings account that was linked to my checking account.

• The account was also linked to my ATM card, so I could withdraw money from savings any time. ("Hello, Goodbye, Hello, Goodbye," as the Beatles so memorably wrote.)

• Pretty much anything qualified as an emergency.

Last fall, I was brought to greater financial consciousness, thanks to the folks on the Women in Red message board, who posted a frenzy of discussions about wimpy quasi-savers like me.

It's hard enough to survive a major life setback, such as a medical emergency or job loss, but when you don't have a proper financial cushion, the fallout can be devastating.

Savings and debt crisis

Many Americans feel their paychecks are already too stretched for them to save. According to a February 2007 telephone survey by the Consumer Federation of America, only 40% of adults have a separate account for emergency expenses.

As you might expect, young people under age 24 and those with incomes of $25,000 or less are the least likely to save, the survey found.

But this shocked me: Of those with incomes of $75,000 or more, only 58% said they had a rainy day fund. That means even 42% of America's wealthier citizens don't have funds set aside for when trouble strikes.

And, as get-out-of-debt guru Dave Ramsey, author of "The Total Money Makeover," once told me, "You need to build up a rainy day fund, because -- guess what? It's gonna rain."

If you're one of the 60% of Americans who have been too busy to get serious about your own financial safety net, may the following stories inspire you to take action now.

Three things to remember

After having my eyes pried open by the vigorous WIR discussion on this topic last fall, I quickly set up an emergency fund, obeying the three basic principles that a good, solid, there-when-you-need-it nest egg depends on:

• Always put your emergency fund in a galaxy far, far away from your checking account.

• Never link any other account, ATM card, checkbook or even your cell-phone number to your emergency fund.

• Only touch the money when you have a true cash crisis that is so unexpected or of such dire proportions that emergency is the only word for it.

The last point caused much debate in the WIR community, but I like how Dana Balansag of Hawaii defined it: She would only tap her cushion in the event of "job loss, disability, severe medical issues or death."

"Other folks are more flexible in terms of using their EF for other 'emergencies,' like car repairs," Balansag says. "I don't mix and match because then it gets too easy to use the money for other, even less emergency-like, situations."

Behold, a miracle!

Before I knew it, months had passed, and $3,633 had sprouted in the fertile soil of my hard-to-access, high-interest online account!

Of course, I was tempted to spend it on a vacation. Because the other hurdle you hit when trying to save for some unknown future event is that you secretly believe nothing bad will happen.

Which is what I too believed ... until I got violently sick last month, thought it was stomach flu, ended up in the local ER. Two CT scans and one ambulance ride later, I was in the county hospital for an emergency appendectomy.

• Video: Reap benefits with a Health Savings Account

And all I could think through the fog of anesthetic was, "Thank God I saved that money."

We have a high deductible, and the surgical bills haven't started coming in yet, so there may be rough waters ahead financially. But I shudder to think what shape I'd be in if I hadn't created that safety net.

Covering all her bases

Dana Balansag felt the same sweep of relief after her home was burglarized 2 1/2 years ago.

While Balansag was doing chores in the living room at the front of her ranch-style house -- the television on, her baby daughter asleep in one of the two back bedrooms -- thieves tore off the window screen of the master bedroom, climbed into the house and stole several items, including her jewelry box.

"I didn't bat an eyelash," she says, describing how she and her husband took $8,500 from one of their emergency accounts to install iron bars on the windows and two gates at the side of the house.

"With the money saved up, I didn't have the burden of financial worrying when there was already so much trauma going on," Balansag says.

Continued: Multiple safety nets

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