All finance experts talk about the importance of an emergency fund. Here on Penny Thots we even talk about having an emergency fund. By having money set aside, you can better handle issues that arise unexpectedly. There is a key word in that sentence, unexpectedly. For some, their emergency fund gets drained very quickly because they don’t plan ahead for upcoming bills or expenses and instead use their emergency fund.
This leads to a constant building up and depleting of their emergency fund. Making a point to understand your expenses will go a long way in helping you to not drain your emergency fund so often.
What Emergencies Are
Emergencies are times when something unexpected happens and you need money to cover the expense. A job loss is an unexpected emergency. Breaking a tooth and needing to replace it is also an emergency. Having your 10 year old air conditioning unit fail is not an emergency. Nor is the need to replace your tires after driving on them for 40,000 miles.
You have to know what the useful life of products you buy are, so that you can save up for their replacement when they do fail.
Having Multiple Savings Accounts
If you like, you can easily create separate accounts for all of these scenarios. However, you are going to have a ton of accounts. For me, I just have one emergency savings account and I fund it for all of the unexpected situations I might come across.
From there, I have a few other savings accounts for other situations. Anything car related – maintenance, new tires, etc. goes into a car maintenance savings account. For insurance premiums, I place money in my insurance savings account.
When it comes to replacing other items around the house, say the roof, air conditioning unit, washer & dryer, etc., I have one additional savings accounts. Every paycheck, I put a little money into the account. When the time comes to replace any of these items, I have the money to do so.
In the event they fail early, I typically take some money from this account and the rest from my emergency account.
Most experts recommend having 6 months worth of living expenses in your emergency fund. I recommend 9 months. Building the fund up to this level will take some time, but having that added cushion for times when you need the air conditioning unit replaced unexpectedly will allow for a lot of peace of mind.
By planning ahead for emergencies, you can lessen the sting of taking the money out of your emergency fund. No one likes to see their account balance drop. But by taking into account more things that have a useful life and saving for their replacement, the issue of needing to build your emergency fund back up won’t be one of dire circumstances.
Hi, my name is Jon and I run Compounding Pennies. I’ve been interested in personal finance since high school and love writing and talking about it. You can learn more about me in the Authors section of this site.