Articles abound by ‘financial experts’ on how to save money quickly. You see them everywhere, all pointing out the virtues of funding an emergency savings account roughly equal to three (3) to six (6) months living expenses, depending on the stability of your occupation. The real challenge when financial planning for emergencies is that you’re dealing with the unknown; you simply don’t know how expensive each crisis will be, or when they’ll happen.
Find It & Fund It
They make it seem so easy to adjust your withholding, drop the gym membership, take your lunch, ride the bus, caulk your windows, cut the cable, sit in the dark, and live with your parents to find a little extra money in your budget. Then it’s simply a matter of automating the savings process; set-it and forget-it and in 5 years your emergency savings fund will be ready to face any personal financial Armageddon life can throw at you.
Not So Easy
The reality for most of us is that it’s very difficult to maintain the cashflow discipline to build a reserve of this magnitude. It really can take many years of consistent savings, hopefully with no reason to draw-down until the fund is well established. Of course, life happens at the same time; it’s challenging.
Unfortunately, with saving accounts yielding next to nothing there are several tempting alternatives competing for our emergency fund dollars. Although, tasking the Roth IRA or establishing approved lines of credit to meet the emergency funding need each have their drawbacks. Sometimes savings account liquidity is its own reward, no matter the paltry return.
Never Enough
Coming in to this year I was satisfied with our emergency fund. We had consistently been saving money for the inevitable ‘rainy day’ and thankfully had not been confronted by any major financial set-backs. So confident was I that I even began contributing additional money towards our mortgage principal.
Then we started to spend money, mainly from the emergency fund:
- I cleared the last of the tuition expenses for my masters degree
- My bicycle frame shattered, while this was covered by warranty I still paid for new parts and a bike shop rebuild
- Ongoing kitchen renovation
- Living room renovation
I don’t classify any of these expenses as emergencies, and to be honest our emergency fund was still fairly robust. Then the big bills came in:
- Home air conditioning system needed to be replaced – old system was in-op.
- Roof replacement – could have repaired it, but it was close the end.
- Car crash – no injuries, curbed the car while looking at Christmas lights (major embarrassment). Chasing low premiums really hurts when you need to file a claim and pay a massive deductible.
It’s reasonable to argue that these costs are not emergencies either. Home related expenses should be expected and budgeted for, and it’s smart to keep at least enough in reserve to pay the auto policy deductible. Anyway, the spending has accelerated up to this week, and the money we had saved for emergencies is gone. At least we’re not in the red ink, yet.
Now, please let me knock-on-wood before we have a real emergency like a sudden job loss, medical crisis, or worse.
The lesson here is that our emergency savings were inadequate. They should have been double what they were. Now it’s time to aggressively rebuild and save money before disaster strikes.
How satisfied are you with your emergency savings?
I absolutely love that graphic Hunter!
Thanks MC. I put that together using PowerPoint in about 5 minutes.
Whoa, sorry to hear about the car accident. We are aggressively saving up our EF too. We spent a lot of money repairing the 4 plex and the fund set aside for that is gone. Home repair and renovation is so expensive.
Very true Joe, home renovation is expensive. Every project seems to cost more than we budget for.
We have an emergency fund and a slush savings fund. That way we can have money for the real emergencies as well as the unplanned expenses. It works well.
Hope you are ok after your accident.
You are wise to segment your savings Miss T, glad it’s working well for you.
The accident wasn’t a major impact, but just hitting a curb was enough to cause thousands in damages. No injuries, thankfully.
We have been growing ours ever since we got out of debt a few months ago. I am weird with it though, because I really think it should only be used in a job loss situation. All those other little (or big) things I have made separate accounts for. We have a car and home “emergency” fund but I wouldn’t really define it as an emergency when you know someday you will have to spend money on your home and car.
I have been thinking about our ultimate efund goal a lot because once we have our goal I am trying to figure out much I want to keep liquid and how much I could put into other areas. I have been thinking that having an 8 month efund sitting in a bank account might be a little much.
Sorry for my ranty long comment, this has been on my mind. Good luck rebuilding your efund.
Thanks for sharing your thoughts Niki. There’s definitely lots of ways to manage an efund. I’ve tasked the Roth IRA with this in the past but I prefer to preserve those funds for retirement now. Eight months is a strong safety net. My main concern now is that to quickly rebuild our savings, we may have to reduce retirement and 529 funding, and perhaps even delay purchasing a home with our next move. I don’t want to over leverage.
Long ranty comments are always welcome. Thanks Niki.
Oh no! I’m sorry to hear about your car crash. I know what it’s like to gawk at Christmas lights! I’m glad you’re ok. I had to do about $800 of plumbing work this year which was a nightmare to get finished. I had enough to cover the cost but it was not a happy camper when I had to pay the bill. Now that I’m done with holiday shopping I’m back in savings mode. -Sydney
Sorry about your plumbing expenses Sydney. You know when they start digging or ripping your walls and ceiling open it’s going to be a large bill.
Our kids will still be able to enjoy Christmas but I honestly don’t need or expect anything for myself. I’m actually looking forward to the challenge of rebuilding the efund.
For years, we would save up all year long only to have to spend it all at the end of the year – very frustrating. Luckily we had no ‘real’ emergencies, like a job loss or home fire during those years. Any other spending, (even a new roof) was just postponed because we couldn’t afford it. Love those pans sitting around in the living room to catch the rain dripping in through the ceiling!
We were very stubborn in our refusal to take on new debt.
Sorry to hear about your troubles, hope your double up has good success!
Sorry… I had to laugh a little at curbing the car while looking at Christmas lights thing. That is totally something I would do. Sucks that it cost you money though.
I honestly don’t think we will ever stop funding the e-fund. I have separate savings for different things and the e-fund is one of those accounts. I just can’t imagine ever being satisified that I have enough money in savings. Maybe if I could live for like 10 years on the efund I’d be happy. lol
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