I don't have a huge emergency fund in place (yet), and I won't have a fully funded emergency fund with 3-6 months worth of expenses in it until I am free from my consumer debt. In the meantime though, I still want to have at least a "baby sized emergency fund" in place to help me stay afloat and avoid charging anything onto the credit cards I'm working hard to pay off.
What is an Emergency Fund?
According to personal finance guru Dave Ramsey, an emergency fund is "a rainy day fund, an umbrella. It is for those unexpected events in life: a job loss, an unexpected pregnancy, a car transmission going out, and so on. This is not an investment or a Bahamas fund!"
In other words, you should never willingly use your emergency fund. It should only be used in times of a dire crisis when you can't make ends meet (like from a job loss or layoff), or to cover things like a necessary house or car repair.
However, one area I don't agree with Dave Ramsey on is that you should only have a $1,000 emergency fund while you are trying to pay off debt. These days $1,000 won't get you very far if you have a major repair to make or if you have an unexpected job loss (especially if there's only one income coming in to your monthly budget).
Therefore, I've decided to continue building my emergency fund at a steady pace indefinitely as I continue to pay off debt. After my consumer debt and student loans are paid off, I will throw that debt snowball money toward my emergency fund until it is fully funded with several months' worth of expenses.
With all of that in mind, here are 5 examples of things I would be willing to use my emergency fund on to avoid taking on additional debt.
- Car Repairs - As mentioned, car repairs are generally something that most people would be willing to pay for with their emergency fund. As of right now, I only own one car and I need it to get to work and earn my paycheck. If my car broke down and I couldn't get to work, I'd lose a lot of income that I need for my monthly budget. So car repairs are something I'd use my emergency fund to cover.
- Home Repairs - I'm a homeowner, which means when something breaks I'm responsible for repairing or replacing it. Having a landlord that covers these unexpected expenses is a definite benefit of renting, but for me home ownership still won out. This does mean that I need to be prepared to pay for home repairs as things to do wear out and break down over time, it's inevitable.
- Emergency Medical Expenses - I set up a small category in my budget to help cover annual doctor's appointments, monthly prescriptions and medications, and other anticipated medical expenses, but if I were faced with a medical emergency it wouldn't be enough to cover much. Therefore, I'd definitely be willing to use my emergency fund to pay for medical expenses.
- Needed Technology - This may not be something everyone would cover with their emergency fund, but since I've got a pretty stead income from freelancing online, I need to have a working laptop and reliable internet connection so I can work. With this in mind, I would be willing to use my emergency fund to buy repair or buy new equipment for my online business so I don't have a loss of income.
- Pet Expenses - I have 3 dogs and 1 cat. The cost of pet care can be expensive, but to me it's worth it. I would be willing to use my emergency fund to cover emergency medical care or other expenses for my pets (within reason) because they bring me great joy and are my day-to-day companions.
As I move closer to full-time self-employment, I am also considering building an additional "slush fund" to help cover months where my income is lower. Variable monthly income is a part of self-employment and it's important to be prepared for that. Some entrepreneurs choose to prepare for this by having a much larger emergency fund than what is standard, like up to 12 months worth of expenses instead of only 3-6 months. Others set up a separate fund that they contribute to during high income months so they can easily off-set low-income months down the road.
No matter how you choose to set up your emergency fund or how much you are comfortable socking away, it's important to know what you are comfortable using your emergency fund to pay for what you aren't comfortable using it for. Everyone's comfort levels for emergency funds are different.
What are you willing to use your emergency fund for? What wouldn't you use it on?
Photo courtesy of: Chris Potter