Question of the Day: The Emergency Fund
My goal is $15k and I’m 90% of the way there. Many people save various amounts for various reasons and you must save based on what’s best for your situation.
$15k makes me comfortable.
Emergency means different things to different people. For me, I’m not concerned about losing my job. Not only is it secure, but I’m 100% confident in my abilities to find another job with a comparable salary in less than 3 months. I’m a risk taker and I’m flexible. I don’t mind moving across the country (or even out of the country) for an opportunity. I’m not concerned about the possibility of being injured. I have 8 weeks of vacation pay, 8 weeks of sick leave, adequate medical insurance, disability insurance, and long term care insurance. Again, you must save based on your own risks and concerns.
However, as a single mom, I view my emergency fund as a safety net for various reasons.
In YOUR opinion, what is an appropriate use of the emergency fund?
In YOUR opinion, what is an INappropriate use of the emergency fund?
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Having enough stored up in order for you to continue supporting yourself should an unexpected setback occur. However, the assumption is that as soon as the setback occurs, you’re doing everything within your power to get back on track, i.e. get that new job as quickly as possible…not run through the funds because you happened to have 9 months worth. If you can get work in 3 months and have children…15K sounds reasonable to me.
I happen to have 6 children, and finding work may take longer in my area. I’m planning on building up a 6mos emergency fund when I get to that step.
I think an appropriate use would be for those little emergencies that you just did not anticipate like a car repair or if the hot water heater goes out at your house.
An inappropriate use would be using your Efund to buy that new flat screen because it is on sale and you don’t want until you save up the money for it. If you happen to lose your job, you can’t live in that flat screen.
I just cashed out my meager e-fund (2.5K) to fund some of fiance’s equipment so he can start his own business and leave his miserable day job. He is really unhappy there, and that was worth about a month’s time stuck there.
I’m not thrilled with no e-fund, but we could make all our critical expenses with one of us working. If worse came to worse, I have a few relatives I could ask for a couple grand. We’re just renters with no kids, so it’s not a huge risk. His happiness is an emergency to us.
An emergency for me would be a car repair, having to fly back home for some family emergency or some type of medical problem that would require out of pocket money for my son. Those are the things that I think of when I think of putting away money out of each paycheck. What is not an emergency is a disney world vacation that he keeps asking for or a spring wardrobe..
My view of an emergency fund is for something borderline catastrophic and unexpected (out of work for an extended amount of time, exorbitant medical bills). To me, things like car repairs or home repairs don’t constitute an emergency. If you have a car or a home, you should realize that at some point down the line, they will need maintenance and you should have money set aside for such.
I’m well-insured in every aspect (health, auto, disability, etc.) and like you, I’m not concerned about losing my job or my ability to find another if need be. I’m fortunate in the sense that any unexpected expenses (car or home repairs, medical bills, family emergency) can be handled from my day to day cash flow. In the event that ish did hit the fan, I have assets that could be liquidated as well so I don’t feel the need to have excessive cash lying dormant in an emergency fund.
My “immediate” e-fund is for things such as car repair, or unexpected doctors trips. Since I’m single and rent, I don’t have a lot of things that would come up that would cause me to use it. Now I wouldn’t use it to purchase the flat screen that I’ve been looking at that would go perfect on the mantle, or that apple TV that I’ve been itchin for like a crack addict.
Now my “Inetta the Moodsetta” e-fund that I’m building is strictly for either me having to walk off my job, or my services no longer being needed (because I’m a contractor).
On another note, I know that you have sort of a budget for what your going to spend, and where, such as for groceries, eating out, and entertainment. But do you allot yourself money for urge spending? Like I have a urge for these jeans (we won’t state the cost), but I’m wondering if you allow yourself say $100 a week to just blow on impulse buying just to keep you on track for saving. I’ve been thinking about doing this, because after working I feel like I deserve to have my 10 minutes of keeping up with the Jones.
Yep, I call it my “Be Fab” fund. Have you read any of my shopping posts? LOL I haven’t had an excursion in a while because the Christmas holidays through me off track for so long. But after March 10th, Single Ma is loooooooong overdue for a fabulous pair of shoes!!
And I’ve been trying not to ask, but my curiosity is getting the best of me. Can you tell me what’s an “Inetta the Moodsetta” e-fund? It sounds rated R. LOL [-SM]
I’m single and childless, and while I’m confident in my ability to find another job, I’m not confident in my ability to find another job HERE, rather than 1.5 hrs away. Since I own a house, that could be trouble. My current e-fund covers 3 months of living like I do now, plus three more months of bare-bones living. I’d probably cut back to bare bones after 1 month, so it might stretch to 7 months total.
It’s hard to immediately cut back (if you had a sudden job loss) because everything has a final bill. Drop cable and you get one more bill. Drop the land line and, yes, one more bill. And I put everything on a rewards card and pay it the next month, so that bill too will come after the day I decide to cut back. So when you plan, you probably need to include one month at your current spending levels before assuming you’d cut back.
I consider an emergency to be a surprise medical expense or a plane ticket in the event of a family crisis.
However, my emergency fund also covers all of my expenses for three months’ time if I were to lose both my job and my live-in boyfriend. I don’t play around…I need to be able to count on myself for survival.
Hmmm, I had to give these questions some thought. I realize that the amounts, reasons, etc. have changed over time, which only makes sense as my personal circumstances have changed.
Right now, we divide our “emergency money” into approximately three categories: “everyday crap”, “shyt happens” and “the roof is on fire…baby, go get the hose.”
Roughly speaking, the first fund is for expected larger house bills, family vacations, etc. The second is for the unexpected expenses, (house, car, someone needs some help, etc). The third is if someone lost a job, has an short-term disability, etc.
I like the concept of 3 pots with varying levels of severity. LOL @ “shyt happens” and “baby go get the hose” [-SM]
They are funded according to the severity of the potential problem. The first covers a month of our bare bones expenses. The second has about 2-3 of bare bones expense funding and the third has funding for about 10 months of bare bones expenses. We define “bare bones” as our monthly spending without college account fundng, outside investment funding, only the company match on the 401(k) and reductions in variable expenses.
Generally speaking, if we want to splurge on something and we both think it is a good idea, we pay for it jointly out of cash flow. We don’t generally consider splurges to fit into any of the above three categories.
My girlfriend and I split the rent and utilities. I know I can cover my share of things for 4-5 months based on my emergency fund.
I would use the emergency fund to cover me if I was
* out of work/between jobs.
* something happens medically (I have about a $700 deductible on my insurance)
* something with my step-son’s school (famous for having last minute fees thrown at us)
We are both holding off on all major purchases (for me computers, tv, other toys, for her shoes, and clothes) because we are getting out of debt. I would never consider my emergency fund for those items.
Reading some of the other comments here makes me a bit glad I don’t own a home now. Since we live in Manhattan, owning is nearly impossible financially speaking (I can rent a place for say 3000/month, where the mortgage would be over 9000/month!) So being priced out of home ownership here is enabling me to save more and gives us both incredible flexibility if/when we want to move somewhere else.
$3K is enough for us. Anything happens beyond that I will just sell some mutual funds.
It all depends on your career stability and risk factor
I have to admit, I find the “well, you SHOULD already have savings earmarked towards X and Y; emergencies are emergencies” attitude a bit counterproductive. Not everyone starts out with $5K in the bank after graduation, you know?
I agree. A new college grad has less to lose as well, say, compared to a married couple with a SAHM, 2-3 kids, a mortgage, and 2 car payments. Besides, an e-fund takes a while to build. $20k doesn’t magically show up in your account overnight. I’ve been working on my $15k for a long time. [-SM]
So I think the definition does, and probably should, change over time.
When someone is just starting out or reentering the workforce, I think anything that would severely disrupt cash flow (car repairs, plane tickets to visit very ill family members, and of course the usual job loss) is a legitimate use of the fund.
As savings and income increase, it might be worth considering having different baskets of savings for different goals. Obviously, some people prefer to keep everything in one account anyway.
When someone is at a point that most minor (“minor” meaning </=$500, say) things can be largely handled with monthly cashflow, it’s probably time to focus on having amounts set aside for expected expenses (some medical, some car, some home repair) and having an emergency fund be for the truly unexpected and long-term setbacks (job loss, major sick leave for self or family).
I guess my point is that having a label on the money is way less important than having the money if you need it.
I have a six month emergency fund of $20K. But, for years, I had only $3,000 in it and it seemed to work fine. Now that my expenses are greater and I am a single parent of a just-turned-15-year-old-going-on-40-daughter, I feel the need to have more. I am starting to think I need to double it.
Because, like you, I’m confident in my job and my job skills (plus, unlike you, my salary is easily almost-replaceable by easy-to-find stuff like retail and waitressing), and young and healthy, my cash savings ($6,600 at the moment, shooting for $10,000 by the end of the year) is less about emergencies and more about freedom. I’ll be happy, for example, to spend it on moving myself to the city where I’m going to pursue my PhD and setting up my living space. But I also envision it paying for a plane ticket in the event of an emergency (physiological, psychological, familial…), or giving a friend some money if she desperately needs it.
What people said — emergency funds should cover things like housing repairs, car repairs, medical expenses, crisis trips, as well as living expenses if you lose your job. Anything that you CAN’T put off — so if you didn’t have the emergency fund, you’d be putting it on a credit card, bouncing checks, begging your family, or turning to a payday lender.
There are many different strategies, the one I follow is 3 – 6 months salary (only basic survival costs) in a high yield savings account like ING or Emigrant Direct. 3 months if you have good job security (like government or state jobs), and 6 months if layoffs at your job are not uncommon. It’s really about what makes you feel comfortable though…
Like mentioned above, my definition of what goes to the e-fund is changing. I’m new at this. Just graduated from college last May and got a full time position. Right now my efund covers any emergency that happens to my dogs, car problems, emergency dental, unexpected emergency travel. I’m fully covered in housing and medical. One of my short-term goals is to set up a separate account for the dogs, car and dental issues and keep building that safety-net fund.
I never thought to plan for my dog when considering emergency expenses. Hmm…does that make me a bad dog mommy?[-SM]
An emergency fund should be ALL your living expenses for 3-6 months…up to 12 months if you are VERY conservative or have a job that may not be as secure (or the income isn’t, like in sales).
An emergency is anything that affects food, shelter, clothing and transportation, as well as immediate health concerns.
Hi SM – we have 2 emergency funds: $2K in our savings linked directly to checking to cover those immediate unexpected bills like dentist and car repairs, and $20K in a Vanguard MM account to cover living expenses should either I or Hubby lose our jobs (hopefully it would not happen at the same time!) plus other periodic expenses like childcare for the summer. I add to both every month, and when the $2K savings gets too big I move the extra to Vanguard, and I’m hoping to keep growing the Vanguard account.
My mother has an inoperable malignant brain tumor, and her own finances are less than tidy. Her condition is stable right now, and she is making efforts to attend to her affairs, but I am looking at the very real possibility of missing an unknown amount of work should her condition worsen suddenly, and down the line there will be funeral expenses, and time off for mourning.
Neither of my part-time jobs compensates for sick leave, vacation, or family leave, and so I need to be able to cover my expenses completely. Naturally, I hope that I don’t have to touch any of that money for a long time.
As a general principle, I believe that emergency funds should be reserved strictly for emergent situations that require immediate action. Major purchases, pleasure travel, even business start-ups can, and should, be planned ahead for separately. In principle. But it’s nice to have a little walking money, in case you get fed up with… whatever ;)
Empress Juju’s situation with her mother underscores what I think is important about an emergency fund– I think that an emergency fund needs to cover living expenses plus additional costs that the emergency itself is likely to incur. Or at least mine does. When I was laid off, the only thing that kept me sane was knowing that I had an emergency fund. And in the midst of health stuff, the last thing I would want to add to the mix is worrying about money.
I’ve been thinking about what you said about feeling okay because of your capabilities and insurance coverage. I’m not in quite the same situation as you– I’m self-employed and couldn’t find a company willing to give me disability coverage (they don’t trust you not to fake an injury if you’re not out of the house enough). And of course, self-employed means no banked vacation or sick leave. I think even if I were salaried and had all the good insurance, my main goal would still be to build up enough savings to cover things for at least six months. Especially if I was a single parent. If (God forbid) I suffered a brain injury, I would want the people helping me and my child to have access to actual cash while the insurance paperwork got sorted out– I know that sort of thing can take time.
…you know, it occurs to me that I don’t know where anyone in my family keeps their insurance paperwork, and none of them know where I keep mine. And that I would probably have to put together some sort of legal document so that they would have access to my accounts if I was incapacitated. All the saved money in the world won’t do any good if they can’t access it when it’s needed.
I’d read somewhere that a good rule of thumb was to have 2 months living expenses saved for every member of your family. So, since it’s just me and my husband, we’re aiming for 4 months saved.
I really don’t think we’ll use our EF much. Like you, we have stable jobs and are well covered with insurance. Still, it will be good to know that we have an extra safety net when we do have it! We’re aiming for $15K too.
>well, you SHOULD already have savings earmarked towards X and Y; emergencies are emergencies
I think what the poster above was referring to when he said the above
was “Irregular expenses savings”
or “Freedom Account” by Mary Hunt
you don’t really have to have 5k after graduation for this!
basically you calculate how much you are likely to spend on car repairs etc etc a year and divide by number of pay checks. then u put aside that amount each pay check.
google it or read the above link :)
I once used some of my meager emergency fund to fly a different state to see my best friend get married. She had decided to do it just about two months before, and it was a tourist hotspot, so there wasn’t any way I could save a plane ticket/hotel in that time period. Even though I was annoyed with her for not giving anyone notice about the ridiculously expensive location and wedding, I decided that it was a once in a lifetime thing, so painfully I took it out of my emergency fund. Since then I have advised all my friends in their twenties to start a “bridesmaid fund” on ING, so the pain of wearing an expensive ugly dress is not magnified by the pain of putting it on your credit card or loosing your savings!
That friend – yesterday she told me they were divorcing after just 18 months. I’m still not sure if that was an appropriate use of my money.
Would you use your emergency fund for a downpayment for a car? house?