We have decided to increase the amount of money that we keep in our emergency fund.
One of our goals is to keep an amount equal to six months’ worth of expenses in our emergency fund. The primary purpose for the money in our emergency fund is to replace (or supplement reduced) income.
Income designated for mid- and long-term savings goals (like automobile replacement, new furniture, etc.) is kept in the same savings account – but is not considered part of the emergency fund. The savings goals are part of our monthly budget – payments that we “make” to ourselves, each month.
As a side note: We also have long-term disability insurance. The emergency fund is designed to replace income, should we find ourselves unemployed. The disability insurance is in place, should one of us become, well, disabled.
Like I said, we have decided to increase the amount that we keep in our emergency fund. Here’s why -
1. Inflation. I’m not interested in what the pundits say – inflation is here and very, very real. I have been using a grocery price book for several years – and the cost of food and household items is up, rather dramatically. Feeding and clothing our family of five now costs considerably more than it did just three years ago. This has to be factored in our calculations.
2. New house. We moved in to our new house, just over a year ago. I now have enough data to estimate our monthly-cost-of-living-here. Plus, we now have a fixed mortgage payment, home owner’s insurance, and taxes to consider.
3. Kids. When I first calculated six months’ worth of expenses, we had just two children. Now, nearly five years later, we have three. Providing for them is our top priority, so their needs must be added to our emergency fund calculations.
4. Peace. This one has very little to do with “math” and much more to do with “peace of mind”. Personally, I’m not convinced that the worst of the great recession is behind us – and I want to be better prepared for any further downturn.
So, we are going to increase the amount of money that we keep in our emergency fund. We have recalculated what six months’ worth of expenses is for our family – remembering that some wants will go by the wayside, and even some needs will be affected, should we face a real emergency. Redirecting the money towards savings will also slow our mortgage debt reduction (just a bit), but in the end, the peace of mind will be worth it.