Friday, August 24, 2018

More Emergency Fund Advice

First things first: YOU NEED AN EMERGENCY FUND!!!
Now that we got that out of the way, let's talk about what an emergency fund is and is not.
When people suggest an amount for an emergency fund, it is often couched in terms of 3 to 6 months of expenses. This leads to the idea that its primary purpose is for loss of income. This could not be further from the truth. While job loss is the worst case emergency for which your fund could be used, it is not the most likely, especially for a someone with a solid job. Your emergency fund is most likely to be used for an unexpected repair or an emergency trip. I recently had a slew of emergencies (hence the impetus for this post) and they included AC repair (which looked like it might be a replacement) a broken dishwasher and a near dead dryer. I also either need a new car, or have some impending repairs due on the old one.
All of the above is no sweat because I have an emergency fund. Not only that, I have a budget line item that feeds into the emergency fund so I don't have to refigure my budget to refill the fund for the money I just took out.
Knowing how much you need, and how to get the money in there is hard. That's why people simplify with the 3 to 6 months expenses trope. It will generally overfund it, as well as covering the worst case, which is often an extended job loss (it's just not the likely one). What follows is a mix of what I do, and advice for people just starting out.
I set my emergency fund at six months of MANDATORY expenses: rent/mortgage, basic (or locked in by contract) utilities, basic food, and miscellaneous NEEDS (no BS wants disguised as needs). This was easy since I have a budget (you do have a budget, right?) I then set a budget line item that filled the budget in 12 months (this is overkill - 24 months is plenty - 30 months the longest you should go). If my emergency fund gets over-filled, I buy myself something I want, but wouldn't ordinarily be willing to budget for (like a trip or fancy electronics). Make sure this amount will cover a major car repair or a trip to your furthest relative's home.
Doing it this way ensures you will eventually be prepared for almost every emergency likely to occur. But what happens if an emergency happens while filling the fund? The honest answer is you might be screwed. To avoid that, use a tax refund, other savings, or a bonus to fill the fund up as quickly as possible.
Bottom line, you need an emergency fund. The added bonus of having one is that our old buddy Murphy tends to cause emergencies for people who aren't prepared. Having an emergency fund is, paradoxically, one of the best ways to avoid needing one.

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