Emergency Fund

Emergency Fund: The Breakdown

If you read my last post, you will see a comment from Living Almost Large. This post was inspired by LAL’s comment…

Emergency Fund: The Breakdown:

How Much? $20,000 (16K w/ ING, 2K w/ Tradeking, 2K w/ Primary Checking)

Why $20,000? Our monthly (necessity) spending = $3000.. 3K x 6 months = 18K. So, I wanted at least 18K to cover the cost of living should I lose my job. I bumped it up to 20K for a bit of added security. (The 2K in my checking account fluctuates a bit, and I wanted the 18K to be more “stable”.)

What is is for? Primarily, this money is here for a major life event, such as a job loss or a death in the family. Secondarily, this money is here for a minor life event, like a blown tire or a broken air conditioner. If you BUDGET for those secondary level emergencies (by setting aside a portion of each paycheck to pay for nonrecurring events), then you will not use your emergency fund for such purposes. If you do not budget for those secondary level emergencies, then you will have to use your emergency fund for such purchases. How do I handle it? I usually do a little bit of both. For instance, I purchased a set of new tires for my wife’s van last month. Prior to the beginning of the month, I budgeted the tire amount into our regular monthly budget. So, I did not have to use any money from savings to pay for the tires. However, if I had not budgeted for the tires, and one of them had gone flat, I might have had to dip into my emergency savings, depending on how much discretionary money I had left in my monthly budget. Long term, you want to get to a point where you are budgeting (setting aside allocated funds) for almost every conceivable event, even some of the primary emergency types. Right now, I keep my budget pretty simple, and I put every dollar that I do not spend into a savings account, creating a ‘slush’ fund for various unforeseen expenses.

Two kinds of emergency funds: Basically, I have had two kinds of emergency funds in my life. First, I had my baby emergency fund of about 1000 dollars. I had this emergency fund set aside while I was getting out of debt. It’s purpose was to get me out of a jam when / if something unexpected came along. In other words, it’s purpose was to keep me from borrowing money! Now, I have a different kind of emergency fund. It’s purpose is to provide a cash cushion should anything happen to me or my family. It’s there to offer peace-of-mind. I can use a small portion of it, if I don’t have money on hand, to meet small “emergency type” needs. Or, I can totally leave it alone, “forget” about it, and know that it will always be there as my safety net.