When I first started getting out of debt, I created a bare-bones budget and a bare-bones emergency fund. I kept $1000 in my ING Savings account, and I only budgeted for “necessities”. After getting out of debt, I stuck with the “bare-bones” budget, but I increased my emergency fund to $20,000. Now that I have my fully-funded emergency fund, my budget has been refined and I am “budgeting” for specific future purchases. My goal is to make my current emergency fund “obsolete” by replacing it with defined savings categories.
While getting out of debt, the only purpose that my emergency fund served was to pay for “unplanned for expenses”. After getting out of debt, but before I refined my budget, the purpose of my emergency fund changed. One, my emergency fund was increased to provide a “cushion” in the event that I lost my job. Two, my emergency fund was increased to so that I could replace automobiles, furniture, etc. In other words, I had a pile of cash, but it was “unallocated” and not associated with a SPECIFIC future purchase.
Now, my goal is to sub-divide my emergency fund into “defined savings categories”. Every month, I will allocate a portion of my budget to each of these categories, ear-marking funds for SPECIFIC future purchases and for SPECIFIC emergencies. I will continue to dedicate $10,000 to my “lost my job” emergency fund. The rest of the money in my emergency fund will be reallocated into specific categories. Note, the money itself will not “move” but I will track how much I have allocated to various categories using a spreadsheet. New categories to be created and funded include, but are not limited too, automobile replacement, furniture purchase, and vacation savings.
My ultimate goal is to have enough money allocated into each category that I can make a purchase, like buying a car, without using “emergency funds”. I want my emergency fund to simply exist in the event that I lose my job or have a “real” emergency, not as a source of funds for “expected and anticipated” expenses.