all funds are emergency funds until you have a sufficient buffer

April 14th, 2008

All Funds Are Emergency Funds Until You Have A Sufficient Buffer

I have been thinking lately about our expected upcoming expenses. As I have mentioned in the past, we live in an older home and several of our appliances are nearing the end of their expected life span. We also have two older cars, one is a 1996 Toyota Corolla and the other is a 2001 Saturn. I wouldn’t consider the Saturn older necessarily except that it has already proven itself less than reliable.

We have our $1000 beginning emergency fund sitting safely in our savings account, and I save an additional $25 a month in what I call the “long term” fund, which eventually will become the replacement fund for appliances or other home improvements and maintenance. We are still paying off debt so the beginning emergency fund of $1000 is all we have at this point labeled an emergency fund.

As our debt comes closer and closer to the point of being eliminated, I’ve thought about starting a few miscellaneous and specific savings funds, such as a new (to us) car fund and a new furnace fund. But the reality is, until we have a sufficient emergency fund that provides for an adequate cushion for the vast majority of potential emergencies, even if I am splitting up money into different “funds”, it is honestly all just an emergency fund. When we had our big unexpected car repair in January, every available resource (except the children’s college accounts and our retirement funds) were completely tapped, including the “long term” replacement fund and even my spouse’s birthday money. And if we had another emergency of the same magnitude, the same thing would happen.

At some point in the future, we will start to be more specific and selective about the money we are putting into savings and portion parts of our overall savings plans into funds for appliance replacement, car replacement, home improvements, and other savings goals. But until then, the money that I save beyond our retirement and college savings, no matter what I call it, are in reality is a backup emergency fund if the $1000 one is not sufficient. So into one single fund those savings continue to go.

This post is part of the MBN writing project on emergency funds.

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16 Responses to “All Funds Are Emergency Funds Until You Have A Sufficient Buffer”

  1. I know that $1000 is the ‘magic number’ that Dave Ramsey and others recommend for emergencies…so that you can throw everything else at your debt and pay it down as fast as possible, but…

    I think it’s just an easy number to remember and doesn’t really take into account the reality of emergencies.

    The idea behind the emergency fund is to have enough cash available to handle “emergencies”–expenses that cannot be postponed or avoided. If you sit down and think through what kind of expenses might be emergencies, you can plan a better emergency fund.

    For example, car troubles (or car accidents) are practically a fact of life for most car owners. How dependent are you on that car? Can you do without for a couple of months while you scrap together enough for repairs or replacement, or will you lose your job if you don’t have another car immediately. If the latter, then _your_ emergency fund needs to be bigger..enough to handle getting a replacement car (even a beater). Another example is the furnace. In some parts of the country and in some seasons, you can do without for a few months. (I know someone who is choosing to postpone a furnace repair because we are going into spring.) Other times, a furnace repair can be the difference between life and death. If that’s you in November, do you have enough to cover that emergency?

    My experience is that $1000 just isn’t enough. I personally keep closer to $3000 on hand. After I got it built up, then I went back to managing the debt…and I sleep better.

  2. The reality of it all is that things (cars, appliances, other durable items) eventually live out their usefullness and need to be replaced. A repair job might not cut it.

    I keep a couple seperate accounts for savings, but in reality, it is all one big emergency fund.

  3. PaidTwice, I love the title for this post and fully agree with your take.

  4. @Kathryn – I think that for someone (like me 10 months ago) who never saved anything – the idea of saving $1000 is daunting but approachable. The idea of saving more than that seems just overwhelming and I go back under my rock.

    Now, where I am, is different. But just like Ramsey’s “pay the small balances first” works for people who feel overwhelmed and can’t get started (I didn’t need this hack but many do) the idea of the $1000 emer fund seems… do able. Once you get in the habit of having money sitting around just to have money vs “for” a purpose, I think its easier to adjust upwards.

    Our current reality is although we have $1000 in savings, we actually at any given time have closer to $2000 available depending on how close to when I overpaid the student loan it is. For us this feels okay temporarily. I sleep better at night with the loan balances falling faster, because at the moment – they are what oppress me most.

    At some point in the future we will probably have a $15,000 emergency fund, and that seems daunting but doable now. A year ago that would have seemed a pipe dream.

  5. I agree that when you actually do need that emergency fund, all availabe money will go to whatever the expense is. While we all have different numbers we’d like to eventually get to, the real beauty of the emergency fund is that we don’t have to tap a line of credit when something unexpected comes up. It’s so much easier for me to pay down my debts knowing that I won’t just be running them back up again when something bad happens!

  6. I think this is true even once you have a larger emergency fund. My husband and I have over $5000 in ours and then other savings accounts for our next car, home maintenance, etc. In the end, though, if something came up that was more than $5000 (let’s hope that NEVER happens!), the other funds would get used.

    I really like this article – stumbling it :)

  7. I totally agree with you. At the moment I only have one savings account since I am trying to pay down debt and have that $1000 in savings for emergency and working on slowly building it up while paying gwn debt. I do worry that it might not be enough for an emergency, and any other savings I have would all end up for the emergency. Great article.

  8. I have also been trying to decide whether to split my emergency fund into multiple accounts, or keep it as one. While I’d like to separate them into separate things (car emergencies, pet emergencies, etc), I figure, like you said, if any major emergency happens, you’re going to need as much of that money as possible — you’re not going to say, “Oh crap, I need another $500, and I have it in my car emergency fund, but this is for a home appliance…” I currently only have a basic emergency fund and a travel fund. I am considering creating several savings accounts for certain goals, such as home downpayment, or future car, or new washer and dryer — I think that can be great if you have very specific things you’re saving for. But if you’re just hoping to have money in case of any type of emergency, it may be best to keep it as one account, ready for any incident that may happen.

  9. Sounds right. We try to think of our funds in different categories, but one reason we did a Roth IRA is so that, if worst comes to worst, we can withdraw all our contributions.

  10. At times of crisis all our funds turn out to be emergency funds…thats very true.

  11. Hey there. My name is Nick and I am a blogger over at RBCp2p – a blog for students by students. I recently wrote a piece about emergency funds and quoted a short bit from this entry of yours. Just wanted to say that this is a great blog you have and I’ll be sure to consult it in the future. If you’d like to see the entry I wrote, you can see it at http://blogs. rbc.com/rbcp2p/2008/04/emergency_funds_1.html

    Cheers,
    Nick
    RBCp2p

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