Having an emergency fund gives huge peace of mind. But how many of these expenses are actual emergencies?
Dave Ramsey thinks that emergency funds are so important that he devotes two of his seven Baby Steps to them:
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- Save $1,000 to start an emergency fund
- Pay off all debt using the debt snowball method
- Save 3 to 6 months of expenses for emergencies
- Invest 15% of your household income into Roth IRAs and pre-tax retirement funds
- Save for your children’s college fund
- Pay off your home early
- Build wealth and give
Getting the first emergency fund ($1,000 or even $500) lets you avert one or two medium expenses like a dead starter motor or a leaking water heater. Of course, any emergency fund is better than no emergency fund, but $1,000 covers a lot of typical emergencies.
Getting the bigger emergency fund (3-6 months' expenses, probably high-four- or low-five figures) can get you through the medical expenses of a decent-sized car accident, a moldy basement, or getting laid off.
Exactly how much you need to have in your emergency fund … depends. You possibly can get by with less, for example, if you have two incomes coming in.
Some “emergencies” really aren't emergencies
In actuality, a number of the kinds of expenses mentioned above aren't really emergencies per se.
The financial fallout from a car accident is an emergency. But, although stopping the gushing water from a failed water heater is an emergency, buying a new water heater isn't really an emergency, because stuff fails.
The only part of this that's a bit of an emergency is the timing of dealing with it when it does:
Boy, I sure am glad that water heater of ours rusted through today! ~No One Ever
Here are a few kinds of expenses that, truth be told, aren't really emergencies, but can be saved for in exactly the same way as an emergency fund:
Vehicle repair expenses
I've begun changing the oil on our vehicles. The last couple of times, I've gotten it right, but over this past weekend I failed to tighten the oil pan screw enough, and it leaked a bit after it was driven around.
Definitely not an emergency (we just needed to tighten it down a bit more than I did). But it reminded me of the time we had to replace the oil pan on one of our previous vehicles because someone stripped the threads on the screw hole by putting it on too tightly.
That cost about $400. This is one category of expense that we set aside money for each month, and if I screw up again, we have the money to cover it.
Vehicle purchase expenses
I've only gotten a vehicle loan once. We made nearly double the minimum payments to pay it off quickly.
Our credit union wasn't happy when we paid off the loan, but we were!
If we're not to go through this exercise again, then we need to be setting aside money for our next used vehicle. (Buying used when it makes sense is my best money-saving tip, by the way!)
House repair expenses
When we first bought our current house, there were a bunch of things to fix. And up until recently, we hadn't really properly budgeted for maintaining the house; we just “took the expenses out of hide” as they came along. One of our retirement loans was for a big repair to our HVAC system.
The smarter thing to do would have been to take into account the cost of things like new HVAC systems, new roof, siding, etc., and saved up for them based on the expected lifetime of the items. Same thing for the interior: rugs, flooring, and so forth.
Big appliance repair or purchase expenses
Washers and dryers wear out. Refrigerators bite the dust. Water heaters leak. You get the picture.
Setting aside a fund for dealing with big appliances helps to avoid budget shock.
The fund could be used for fixing a dryer or purchasing a new refrigerator.
Work in progress
Like most thing personal finance, our “emergency” fund is a work in progress.
We're to the point now that we have a decent “emergency” fund that can take care of one or two really big expenses.
We're also to the point that we are beginning to set aside money explicitly for the categories mentioned above, realizing that these aren't emergency purchases but planned purchases.
That's why we continue to budget — in a low-tech way, but it works! And each month we get a little bit further along.
Getting all of these future purchases funded won't happen all at once. It happens a little at a time with steady saving.
