Experts are all over the map on emergency funds. $1000. 1 year of expenses. 5% of every paycheck. All nice ideas, but it helped me more to think of the types of emergencies I'd like to fund, and the types of savings I'd like to have, and go from there.
To summarize, I keep:
- $3000 small emergency checking account pad
- 3 months CD for big emergencies
- 3 month CD for emergencies or car buying
- Everything else in taxable brokerage
What are my likely emergencies?
First, I went through my bills over the last year and looked at unexpected things that I HAD to pay for. Vet bills, car repairs, a new refrigerator when ours failed. If you don't have a house, car, or pets, your bills will be a lot smaller! I tell people they shouldn't ever get a pet if they don't have $1000 in the bank. Even a guinea pig can get an infection that requires a vet visit and antibiotics. If you want something to play with that you're not forced to maintain, get a Nintendo.
I totaled all these up for the year and figured I needed an extra $3000 in my checking account just as padding for those emergencies. Since I have gotten okay at budgeting, I could just leave that in my account, but if you're trying to stay away from it you might put it in a savings account at your same bank where it's easy to transfer to checking if you need it. For my target amount, I could even direct deposit $115 a paycheck into it - I get paid every other week, or 26 times a year. Unless I'm having a terrible year, that $3000 should get me through most little emergencies.
Serious emergencies - aka oh my gosh I've lost all my income
Once you've set up your daily emergency fund, experts advise having 3-6 months expenses in a larger emergency fund just in case you lose all your income and have no unemployment benefits. This would be a rough situation that's never happened to me, but it's good practice to know what your expenses are. Pull all your statements - credit cards, banks, everything you use to pay things. See what your purchases are. Set that amount aside. If it's high, work with your family on a "zero spend" month. What can you REALLY cut out if you had to? Don't shop at ALL! Make all your cheapest recipes. Cut out a few subscriptions while you're at it. Some families try this every January, I like to use September as well since we're back to school and not dealing with summer vacations.
Then multiply by 3, and make that a savings goal.
I keep my SERIOUS emergency fund in CDs at my local credit union. If I have to cash them out early, there is a 6-month interest penalty. That's not really that bad and I won't lose money unless I cash a CD out less than 6 month after buying it. Interest rates are better than "high yield" savings accounts (which aren't really high yield... bit of a pet peeve of mine) and they're harder to touch if I'm tempted to use one for a vacation.
"Buy a car" fund
3-6 months was the recommendation but that's a LOT so I allow myself to use my next 3 months expenses as a car fund, too. I've paid cash for our last three cars now. I buy inexpensive used cars that are a couple years old and avoid loans. I don't want to invest this money because we have two cars, so on average I'm buying one every 5-6 years, that's not long term enough to invest. So I have a savings account for this, and I move it to CDs once a year or so.
Taxable brokerage fund
After 6 months expenses, I invest my savings. If the market is up I could use this for emergencies or to buy a car, if it's not then I'll use my safe cash. I know some people say to have more than 6 months saved up, but after a while that's a lot of money, 10s of 1000s of dollars, that's not invested. That seemed like a lost opportunity so I found a whole market index fund and it's been fine.
Comments
Post a Comment