If you take nothing else from this Emergency Fund Series, I hope it’s this: Put more “Why” behind your emergency funds. Just like every goal needs a clearly defined “Why” to keep you motivated, and every emergency fund dollar needs a clearly defined “Why” or purpose.
Having clearly defined boundaries about what you are saving FOR and what the money is NOT for will help in two ways:
-Makes Saving it Easier. It’ll be easier to save money towards the goal since it is more tangible and meaningful than a random dollar amount.
-Makes Keeping it Easier. It’ll be easier to keep the money with a well-defined “Why”. If the money has a specific purpose in your mind, that will likely pop up if you consider tapping into the emergency fund for non-emergency purposes.
My beef with the $1000 emergency fund
I’ve always struggled to understand our collective obsession with the $1000 emergency fund. To me, a $1000 emergency fund is arbitrary and uninspiring. I don’t have anything against $1000 personally, it’s just that everyone seems to set that as their goal without any thought about their own personal finances and values.
Hypocrite?
Now, if you read my post last week about how to get started saving an emergency fund, you will have read that I talked about starting with a…yep… $1000 emergency fund. However, as a result of the prompts I’ll write about next time to determine HOW MUCH to have in emergency funds, I had decided that I needed to have $950 for emergencies. This was based on needing to travel to Seattle in case a parent or sibling was sent there (the most serious medical cases from my hometown were escalated to Seattle, so if someone was being sent there, it wasn’t a good thing). I calculated how much it would cost to get to Seattle plus hotel and food cost and came up with about $950. I decided to round that up to $1000 for ease of tracking but this was NOT an arbitrary $1000.
When I thought about backing off on my aggressive savings plan during the emergency savings mode, I just thought about one of my little brothers being sent to Seattle from a skateboarding head injury, and that kept me going through those hard months of restrictive saving.
Be intentional about what you decide to save money for; the more specific, the better. If you are going to keep a $1000 emergency fund, at least have a good reason behind it.
Multipurpose funds
The game I’m playing here is really trying to figure out what types of emergencies I’m most likely to face and then determining the cost of those scenarios. I’m an optimist so I generally assume that two major emergencies won’t happen at once. So theoretically, that money could be used for different reasons.
For example, the $950 emergency fund is what I consider to be my “Death Fund”. I’d allow myself to spend that money if all other assets were depleted and one of the following scenarios occurred: 1. Death of an immediate family member, 2. I need to buy food or starve to death. If neither of those scenarios come up, then this money is meant to help pay for my own funeral costs to lessen the burden on my family. So really this one fund serves three different purposes.
As long as it has clearly defined WHYs, you will get the benefits mentioned above. Just make sure the different purposes are on the same level of severity.
Types of emergency funds I use:
- Death Fund
- Job Loss Fund
- Common shortage fund
- Minimum balance in checking
- Paper Cash
My WHY’s for each fund:
Death Fund– Money set aside for the most likely life/death scenarios I might face. The purpose of the “death fund” is to either be the final dollars that I spend on food to prevent my own starvation, if a parent/sibling dies or money for my end of life care/funeral costs so that my family doesn’t have to be so burdened financially.
Job Loss Fund- Money set aside for job loss for me, extended family or close friends (my top 3). This is basically a backup for the Death Fund. To be able to use these, no one has to die, but basically, a serious scenario has come up that results in extended unemployment. I think of this as a 3-6 months of expenses kind of fund.
Common Shortage Fund- Money set aside for car breakdowns and unexpected bills. Cars have a defined useful life; we know they won’t run forever. I don’t consider car deaths to be serious emergencies. If transportation is important to you, I’d recommend having a separate fund like this one so that you are prepared to replace your vehicle (even just with a bare minimum car) if it dies unexpectedly. I also use this fund if I have an unexpected expense pop up, like a $2000 dentist bill for example.
Minimum balance- To prevent cash shortages I keep a small amount of money in my checking account to prevent bounced checks and overdrafts. This has varied between being the minimum account balance (like $100) to one month of expenses. Maintaining one months’ worth of expenses in cash allows us to not have to fuss around with weekly budgeting.
Paper Cash- Money set aside for scenarios restricting access to bank accounts. We keep a small amount of paper cash in a small home safe in case of identity theft, or power outage scenarios where we may not have access to our credit and debit cards.
Emergency funds for your emergency funds
The reason that I separate my “Emergency Fund” into 5 “Emergency funds” is because I have these different “Whys” that I want to make sure I’m protecting. I like to consider each fund a moat, protecting the next fund. These built up layers provide a sense of security and peace of mind.
Don’t feel the need to fund all of these at once. I started with a small “Death Fund” and focused on that before moving on to saving money for other types of funds.
Customize!
These are the funds that I decided were important to me. How you structure your emergency funds can and should be customized to the scenarios that you care about and scenarios that you are most likely to encounter.
You might decide to have a separate fund that you call the “Clumsy” fund, where you set aside money for medical costs if you tend to rack those up frequently (I should probably have one of those!). You might have a separate fund for property maintenance costs if you own an older home with high repair costs.
You don’t have to write 1200 words defining your emergency funds like I just did here but do put the time and effort into putting the “Why” into your savings.
For Discussion:
What “WHYs” do you have for your emergency funds?
Do you need to keep a “Clumsy” fund?
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