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
Our emergency fund is out big cash cushion in our bank account, plus some investments that would be harder to get at (but it would just take a few days). Job loss would be the obvious one. We do plan for some repairs and maintenance for our car and house, but anything major and extra would come from there too.When I was self-employed, I started keeping the cash buffer because I was never really sure when clients would pay me.
That is a great reason to keep an extra cash buffer if you are self employed.
I used my EF to fund a sick leave I took from work, and for pet emergencies. Right now I wish I had a bigger and/or better EF in place so that I could stress less about only having a crummy part time job.
I understand. I don’t think mine will up to my ideal level before I quit my FT job, but it is what it is. If I wait for a “perfect time” to quit I’ll be waiting forever as no time is ever perfect.
I budget monthly for car repairs and home maintenance. I have savings at Capital One that I dep to each month. Same for medical since I have an HSA.
I would probably just drop to bare necessities and use it to keep my home running. Shelter, utilities, food and transportation.
This makes me ponder how to really determine how much I need. I always used to lump in medical expenses as an emergency, but if I have 2-3 years worth of “max out of pocket” funds in the HSA does my regular e fund have to be as much? I’m going to need to put my nerd cap on and really go through my budget to figure out the bare bones. Thanks for the food for thought!
I do save some money for car and home repairs each month too (though not much as my budget won’t allow it), but I still want to make sure I have enough in my EF to cover these things because my monthly savings amount isn’t much. It’s great you have so much in your HSA. Perhaps that will allow you to slate your EF for other things instead of medical emergencies.
Unexpected emergency medical expenses would be my number one priority for my emergency fund. Last year when I got sick, my emergency fund was totally a great help!
It’s good that you had it in place then. Medical emergencies and illness are definitely something I’d be willing to use my EF on too. So far though I’ve been pretty lucky in the health department, with no major accidents or illnesses.