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On Emergency Funds - Live Like a Mensch
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Live Like a Mensch

On Emergency Funds

 

Abby Freedman Perry of I Pick Up Pennies had an interesting piece on her blog the other day about emergency funds. It started an interesting conversation in the comments about the nature of an emergency fund and how to save the recommended six months worth of expenses. I thought I would share with you how J and I handle our emergency fund, since it seems to be different from how most financial gurus recommend you do it.

As I mentioned several months ago, J and I use ING Direct for our mid/longish term savings. We in fact have 13 separate savings accounts (all under one umbrella, of course). Those accounts are:

Car Replacement

Computer Replacement

Emergency

France (We're specifically saving for this on top of our vacation fund, although we'll probably also have to use money from vacation when we do go).

Furniture

Home Improvement

License and Taxes (for renewing our cars' plates, etc).

LO's 529 (I put aside 3% of what I make until I reach enough money to make it worth putting in the 529 itself).

Mortgage Savings (When we bought our house, we shopped around to find the best rate. We saved ourselves a quarter of a percent, but we paid and paid for it with terrible customer service and incredible stress caused by our lender. That quarter of a percent only saved us $30 per month, so we decided to actually bank that money each month and do something exciting with the $5400 we'll have at the end of our 15 year mortgage. We figured living well was the best revenge for dealing with incompetent/crazy-making underwriters).

Project Car (J has a 1976 BMW 2002 which has not run in the 9+ years I have known him. It's a work in progress).

Synagogue (For our yearly membership dues).

Taxes (Since I'm self-employed, I need to make sure I put aside taxes from each of my paychecks. Putting the money here until I need to pay it earns me a little interest).

Vacation

 

If we strictly followed Dave Ramsey's advice on emergency funds, that would be the largest of our savings accounts by far. But we actually only put $50 per month aside in our emergency fund, and because of relatively regular use, it's almost never over $1000. It's certainly not full of six months worth of living expenses.

There are two reasons for that.

1. About a third of J's paycheck (which is what we live on, while mine is used to pay off my student debt and save for retirement) goes to our savings categories. If you add in the cash we set aside for our envelope budgeting, it's just over half of his pay going to our savings and spending categories. A big emergency (like a job loss or a major natural disaster or a zombie apocalypse) would mean we'd stop doing all the moving of money into our savings accounts, and we could reduce our cash spending by a lot (since only a few of our cash spending categories are zombie apocalypse necessary). So we'd need a great deal less than 6x J's monthly salary to have six months worth of expenses saved up. A grand still wouldn't cut it, which is why:

2. We consider all of the savings categories together as our Big Emergency/Zombie Apocalypse Fund. If the financial worst were to happen, we could say "The heck with the new sofa/car/mortgage lender revenge! We need water and plywood to board up the windows."

This system works for us because we know that we are saving for specific major purchases that we want, but we also have the security of knowing that a big chunk of money is available if we ever need it.

The only downfall to this system is figuring out if something constitutes an emergency. Since our emergency fund is somewhat feeble, it can feel strange to take a big chunk out of the account for something that might or might not be an emergency. J and I get around this by being willing to borrow from other funds if necessary. For example, our car replacement fund is fairly robust, since we put the equivalent of a car payment in it each month. So emergencies involving our cars that exhaust our car repair envelope will often be paid for by the replacement fund.

J and I are both too impatient to wait for an emergency fund that is completely full before starting to save for fun stuff. We have used this system for about five years, and even though our emergency fund has never reached a really high balance, we've always been able to find the money we need in order to pay for unexpected expenses while still saving for our goals.

Is there anyone else who "cheats" like this in creating an Emergency Fund? How do you save for a rainy day?

Comments

 

Abigail said:

Thanks for the shout out.

I think that my approach generally coincides with yours. I definitely want at least one month's expenses. But once I have that, I want to diversify. I don't want to have three months' worth in my EF -- and have $0 in a savings account. That just seems weird.

I also want separate accounts for our savings. If it's all in one lump, I'll freak out about taking some out for a trip or new furniture. But if we've specifically set the funds aside, I'll have a clean conscience about spending it.

November 6, 2012 2:10 PM
 

Abigail said:

Hmm... I don't know if comments are moderated or mine just didn't go through. So to recap:

I am pretty much of the same mind as you. I don't want to save up a bunch of money in an emergency fund and have nothing in normal savings. It seems weird to me.

Also, I want to have sub-accounts to help differentiate among goals. If we have a lump sum in our savings account, I'll go rigid about buying something with it. Because it's, you know, our savings! But if we have a fund for a new TV and one for travel and so on... I can declench a bit.

November 6, 2012 2:16 PM
 

frugal_fun said:

I've read somewhere that if you're doing a really good job budgeting (which it sounds like you are), then you really shouldn't ever touch an emergency fund. The idea is that you've anticipated what are for most people "emergencies". Car repairs on old cars are to be expected. Ditto with house repairs. Almost everything can be anticipated and saved for.

The only true "emergency" we've had is some medical issues for our daughter. Since they haven't charged interest yet, we're paying her off in payments. :) We're in the hole for this year, but in fairness we built a badly needed office shed completely with cash.

Also, considering every interest rate out there bites, I really should just reopen our ING account so I can track in separate accounts. I use Quicken to keep track of what goes where, but a more visible budget would be helpful.

November 7, 2012 1:13 PM
 

ann said:

Your method is very interesting but is probably a little too complicated to work for me.  I have 2 emergency funds:  the "Murphy's Law Fund" which I keep topped up to a $1,000 limit and the "If I Become Unemployed Fund" which has 6 months worth of expenses in it so far - but I'm aiming for a full 12 months.

The small fund sometimes gets used for big item purchases (e.g. a TV for the bedroom) as well as emergencies.  However, I have two simple rules:  (a) whatever is taken out of the small fund must be replaced as a priority before purchasing or saving anything else and (b) once money goes into the big fund each month it cannot be touched for any reason whatsoever - unless I get laid off work.

Keeping it that simple helps me focus and stick to the plan.

November 8, 2012 3:21 PM
 

haverwench said:

Mine is even more basic than that. We just have two accounts: one at a local bank, for immediate access, and one at ING, for the (marginally) higher interest rate. All expenses up to four figures--both planned and unplanned--come out of the smaller account. That includes most of the categories listed here: my taxes, my IRA contribution, furniture, home improvement, etc. The larger fund is for big expenses, planned or unplanned (e.g., job loss). The only time we've dipped into it in the past five years was to replace our car in 2011 (which was sort of semi-planned; we knew we'd need to replace it sooner or later, and it turned out to be sooner). But aside from that, we don't really make any distinction among cash for living expenses, savings for specific goals, and emergency savings. It's just all there, to be used as needed.

Financial planners would no doubt tell us this system is all wrong; after all, if our savings aren't earmarked for anything specific, what's to stop us from withdrawing the lot and blowing it on something frivolous? But the answer to that is, *we're* what would stop us. It's just something neither of us would ever, ever do.

November 14, 2012 2:55 PM
 

Live Like a Mensch said:

At long last, after only six months with my new Accord, we have finally sold the Mazda to a nice young

March 4, 2013 5:36 PM
 

Live Like a Mensch said:

So many choices of where to stash your cash... A few weeks back, regular reader and commenter frugal_fun

April 15, 2013 1:28 PM
 

Live Like a Mensch said:

As I've mentioned previously , I'm a big believer in aiming for a modest (under $500) tax refund

April 16, 2013 5:34 PM
 

Mental Accounting: Why You Blow Your Tax Refund but Not Your Raise | BefurgalBehappy said:

Pingback from  Mental Accounting: Why You Blow Your Tax Refund but Not Your Raise | BefurgalBehappy

May 6, 2013 11:33 PM
 

Live Like a Mensch said:

I feel like this picture from our wedding is an excellent metaphor for how J and I handle our money.

June 18, 2013 2:54 PM
 

Live Like a Mensch said:

Several years ago, my sister told me and J that we had taught her that she could afford anything, as

August 21, 2013 12:56 PM

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