Specialized emergency funds
By glblguy
I’ve been talking about the benefits of having an emergency fund for a while now. As a matter of fact, my 7th article here on Gather Little by Little introduced the concept as step 5 of my Getting Your Finances Under Control series.
When I first heard Dave Ramsey talk about the concept it was in the context of a $1,000 emergency fund as baby step #1 in getting out of debt. I’ve maintained at least a $1,000 emergency fund since I first started the process of getting control of my finances.
1,000 emergency fund not for everyone
As I’ve matured in my financial journey. I’ve come to realize that with 6-kids, $1,000 dollars isn’t enough. Instead, I keep on average $2,000.00. There is no magic formula to keeping $2000, it’s just an amount that makes me feel safe. When we had $1,000 dollars, there were a few occasions where we needed more. Not much more, but more. This occurred enough times to where we decided to bump up our emergency fund. The amount money in your emergency fund is a personal choice, and should be driven by your personal needs. Some people just seem to have more fallen trees in their personal lives than others. $1,000 dollars is a great starting point, but depending on your needs more or less may be perfectly adequate.
As with any journey, even your personal finance one, things continually change. When we moved to the NC mountains, we decided to rent out our home in Charlotte, NC since it wouldn’t sell. Our rent is a couple hundred more than our mortgage payment, so the monthly excess is transferred into a savings/specialized emergency fund to cover property taxes and as an emergency fund just in case any emergency repairs need to be made. Fortunately that has not occurred yet, but I’m sure it will.
Here’s where I was naive though: I didn’t anticipate our tenants not paying their rent on time. It would seem this past month, our tenants had a tough financial month. They paid the rent almost 4 weeks late. In order to avoid being late on my mortgage payment, I had to pull funds from our emergency fund to cover the mortgage. I realized I hadn’t planned for this. I made the false assumption that since our tenants had good jobs and were very nice people that they would never be late. Wrong.
Specialized emergency funds
I realized a long time ago that I am far from perfect. I don’t often kick myself too much for making mistakes. I didn’t kick myself too hard for this, but just felt stupid that I didn’t anticipate our tenants not paying their rent. The good news is, I won’t make that mistake again.
I did finally receive the rent payment and used it to replenish our emergency fund. At the same time, I immediately created another ING savings account. Hopefully by the end of June, this account will have enough to cover a full month’s mortgage payment in case something like this occurs again. This will keep me from getting into a situation where they are late again and a the same time something comes up requiring me to have to use my personal emergency fund.
I now have two emergency funds, one for my personal emergencies and another to cover the mortgage payment on our rental home. This has had me wondering if I should create additional specialized emergency funds for things like our cars, our home, medical, etc instead of just having one single emergency fund. Doing so wouldn’t really change the amount of money I have, it would allow me to see the funds at a more granular level. I’m holding off for now though, as it seems like it would only make my finances more complex with little gain.
How about you? Do you have specialized emergency funds? Do you see any advantage to having your overall emergency funds broken up into specialized accounts? If you do have multiple emergency fund accounts, what are they? Add a comment!
Photo by: Jeff Kubina
May 27th, 2009 at 6:54 am
I tried to keep everything seperated by goal but it just got too complicated. I now just add up how much I need for all of my goals and save that amount.
May 27th, 2009 at 8:11 am
Great post!
I firmly believe in a series of emergency funds– for all the potential emergencies that can befall you.
Mr Murphy will visit you- wouldn’t it be nice to have a household repair fund, a car repair fund, a God-knows-what fund . . . ?
May 27th, 2009 at 9:18 am
A good rule of thumb is that you should plan to receive rent, on average, in 10 out of 12 months. This gives you a cushion in case your house doesn’t rent right away at the end of a tenancy, or if your tenants don’t pay.
May 27th, 2009 at 10:45 am
I keep $20,000 for emergency; $10,000 for a down-payment on a car, and a line of credit of $60,000 that if used, I pay off in 6 months. This doesn’t include the ‘nest egg’ fund, nor the equity in our home. We have a disability insurance program that pays $100,000 if we lose a limb, and only use term life insurance which is in the amount of burial costs and mortgage balance. No sense wasting money on extra insurance if you’re budget is in order and your expenses are nominal.
May 27th, 2009 at 11:32 am
@ MITBeta is right on that you should plan your annual expenses on 80% occupancy rate.
Also budget for repairs and fix up expenses when the tennants move out. (ie painting, rug cleaning, changing the locks, etc)
Smart to keep this savings seperate from your household emergency fund and other savings.
May 27th, 2009 at 11:39 am
I kind of do a variation on this theme. I have targeted savings accounts that I put in a set amount every month for things like pets, medical, auto, etc. Since I don’t have to use it all every month it gives me a buffer because keeping it separate is easier to keep track of.
For example, two weeks ago, one of my cats got an eye infection. Since I put in about $80/month in my pet fund (enough to cover routine meds, yearly checkups, plus a little extra), it was no problem to take him right to the vet. I didn’t have to worry about the $100+ bill from the vet. I had it in reserve in that account. That way it didn’t put us behind on any of our debt repayment goals, etc.
The same thing sort of thing happened two months ago when one of our power windows got stuck in the “down” position. I went I got it fixed and had the buffer in my auto account. It didn’t break the budget or anything. It really gives me peace of mind to that things separated like this.
May 27th, 2009 at 11:43 am
Being younger my emergency fund right now is also my vacation fund with it being more focused on vacations. I have savings set up, do you think it’s necessary for me to split the vacation and emergency fund now? Or enjoy my travels and set of EF when I have more income?
May 27th, 2009 at 1:11 pm
I have what I like to call a “local” emergency fund, which is the first $1,000 of my emergency fund stashed in a local bank checking account. The bank is a block from where I work, and I have checking privileges which helps when writing a check out to a plumber, appliance repairman, etc. My remaining emergency fund is at an online savings account.
May 27th, 2009 at 1:22 pm
Thanks for the encouragement to personalize our emergency funds. I think too many times we read a recommendation, get some advice, or blindly follow a plan. The problem is we have have all have unique situations which require an individualized plan. The emergency fund is certainly one such example. My family lives overseas so our potential for a costly emergency is greater thus the need for a bigger emergency fund.
May 27th, 2009 at 2:29 pm
Within the last year we realized the need for an emergency fund. Ours is based more on peace of mind then actual need. Which has in turn increased our savings.
May 27th, 2009 at 5:27 pm
We have a big one and a small one. The big one gets funded regularly, with the goal to pay off the car when the efund is a little larger than the balance. We’re not paying extra as we have it because my husbands job isn’t 100% safe, so it’s doubling as a if we lose his job fund.
The small one gets funded from the leftovers at the end of the month. If we go under in any category, that goes into the small one. We seem to add to it every month, which is a nice surprise since starting to budget seriously in January. This fund covers things that are not budgeted, but are in the several hundred dollar range. Car maintenance, plumber bills, etc. It’s been working well for us.
May 27th, 2009 at 6:45 pm
I have a $1,000 ER fund in our local bank savings account for whatever, it’s easy access that way.
On ING I have a travel savings account, another for bigger emergencies and household repairs/improvements, and one for unexpected pet care.
We will be starting one for a car next year.
I also have another one that I put extra money in and then send it off to the credit card companies.
May 27th, 2009 at 6:52 pm
I thought long and hard about where to balance complexity and separting things out. Here is our compromise – 6 ING savings accounts.
A – Emergency Fund (catastrophes, unexpected house repairs, obscene medical bills)
B – Escrow account (for any bill that doesn’t come monthly)
C – Christmas/Vacation Fund
D – Car Fund (handles all car repairs and is where we put our savings to purchase a new to us vehicle, we don’t do car loans)
E – Husbands Fund (anything he is saving up to buy)
F – Wife’s Fund (dido)
It still feels like one to many accounts but yet it is the right balance for us. Its very flexible to accomodate vacations, Flat Screen TV goals – etc. We just put it in an existing savings account.
May 27th, 2009 at 9:30 pm
This is an interesting topic… I typically like to keep only a minimal amount of cash accounts and then allocate and manage their holdings via a spreadsheet.
But sometimes there’s a good reason for an exception. Once I get back to work – I start a new job on Monday! – and rebuild my Emer Fund, I plan to keep the dollars completely seperate. Likewise my Known Annual Expenses (car insurance and registration, HOA dues, season tickets, etc) will be seperated into a Cash Account with each sub area managed via excel.
In my current situation I’d then have 3 accounts – checking, cash, emer.
In the situation you mentioned I agree with your approach to add a 4th account for the rental house or ‘business’ you’re running. I’d hope to stock it with at least a month’s mortgage and then a few extra dollars for other expenses. I like the idea of parking the monthly income into this account to help build it up and then once you’ve collected 2-3 months worth of mort payments, I’d start redirecting the income towards debt or something else.
Hey, cool topic, thanks for sharing!
Dave
May 28th, 2009 at 11:39 am
Have you heard of Mary Hunt? She recommends what is called a “Freedom Account”. It is basically a checking account that has funds for car repairs, vet bills, insurance payments, and other irregular expenses. Just figure out the yearly amount due for all these and divide by 12. That’s the amount you need to put into this account to pay them when they come due.
May 28th, 2009 at 11:58 am
I keep separate emergency accounts — I find that it’s almost more work to track one account for various needs. I also use the specific emergency funds as sinking funds for annual and semi-annual payments, with the leftover building a buffer as Brian mentioned above. Except a small “local” emergency fund as a couple of others mentioned, we have all of our savings at an online bank.
– efund
– travel (we go to a LOT of out-of-town weddings)
– insurance (auto, our home is escrowed through mortgage company)
– car (payment, repairs, emission tests — just this month it came in handy!)
– pest control (termite bond and other services)
– home maintenance (just started this one)
– credit card holding (some of our CCs will only take 3 online transfers per month, and we have an amex we pay off every month in full, so every couple days I transfer the transactions on that card from checking to CC holding so I can earn interest while I’m waiting for the bill to arrive)
We just started transitioning to this system last fall, it’s given me a lot of clarity in planning.
May 28th, 2009 at 12:45 pm
I agree with Thankful. It is definitely easier for me to keep a handle on with all separate accounts. It creates more transfers, etc, but it is easier than teasing it all out from one account. I also just started this system last fall and it really helps me. I have a buffer in the accounts for unexpecteds and all I need for regular things too. With ING and HSBC it is really easy to set up extra accounts to do this. I love it.
May 28th, 2009 at 1:14 pm
We keep our “emergency” and “sinking” funds in ING. It’s
all in one account but I keep track in a little notebook
how much is allocated to things like emergencies, car fund,
Chrismas fund, insurance, etc. We are saving up a 6 month
emergency fund for the catastrophes and also have one month
living expenses in the checkbook. It works pretty well.
May 29th, 2009 at 5:53 am
@Craig – yes, emergencies and vacations are very different. Would hate to see you return from vacation only to have an emergency you couldn’t pay for.
@Maggie – That’s how emergency funds work, it’s always more peace of mind than need right up until you need it…which you will.
@Carol – Great concept, and no I hadn’t heard of her, but I do have those kinds of accounts as well for my property taxes and Christmas expenses
Regarding the number of accounts, for me it’s just as easy to keep multiple ING Savings accounts than manage yet another spreadsheet. With ING you can literally create a new account in 2 minutes, so why not?
Thanks for all the great comments!