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Monday, March 27, 2017

The Essential Emergancy Fund

Posted by Tim Stobbs on July 15, 2008

Ok after some thought I’ve finally figured out what drives me a bit nuts about emergency funds.  Most people that save one always end up having too much money in them.  Why?  The don’t break down their expenses to the essential payments.

Let’s face it.  When things go REALLY wrong you are likely to want to take a few measures to ensure you are going to be fine.  So some expenses are just going to go.  Cable TV will be gone and so will high speed internet.  Long distance plan will be gone too.  You will likely going to cut down your spending to your essential items.

So if you are going to use a rule of thumb like 6 months of expenses, do it on your essential expenses not your regular expenses.  For example, my regular savings/spending amount is around $3200/month.  My essential spending is around $2300/month.  Which would mean I would have about $5400 less in an emergency fund.

The advantage of this is two fold: a) it is easier to save that much money in the first place b) you don’t have too much money tied up in low yield investments (like a high interest savings account).

I personally don’t have a dedicated emergency fund, but rather a larger cushion of savings in various accounts and a handy line of credit.  Why?  Because for those odd times I need an emergency fund I can borrow up to $10,000 for a low cost of $40/month.  I can float that loan for a lot longer than burning up my savings directly.  I’m comfortable with this and it works for me.  Yet if you like the security of a emergency fund I suggest you think about doing an essential one.

Comments

5 Responses to “The Essential Emergancy Fund”
  1. guinness416 says:

    Depends on your situation, I guess. I had an emergency a couple of years ago that required three transatlantic flights booked on very short notice (ie I paid through the nose) and a lawyer in another country. Any emergency involving my husband’s family could involve the two of us relocating to his country for a few months. Flights, visas, shots would easily cost a couple of months “standard” expenses. And I don’t want to be scrambling to raise that. So, my emergency fund is pretty high.

    Like you I’m not a fan of rules of thumb, everyone should take the time to figure this out for themselves. It probably takes all of half an hour or so of effort.

  2. In the few cases where I have observed couples after a layoff (i.e., a financial emergency), they did not reduce spending for quite a long time (well after the severance pay ran out). You’re right that people should cut non-essential spending, but by my limited experience, they don’t. In one case the husband still had his Blackberry after years of being unemployed and begging for money to put his kids in sports. Few people seem to be rational.

  3. Sarlock says:

    It’s amazing how low you can get your monthly expenses if you really need to tighten the belt. It’s just that most people aren’t willing to make the sacrifices required.

  4. Canadian Dream says:

    Guinness416,

    Wow! Now that would have been a huge amount of cash. Good point. Decide yourself what you need.

    Michael,

    Really?!? People are that crazy not to cut ASAP and make the money last. Wow. I would have never guessed that.

    Sarlock,

    It’s also a mind set. Some temporary pain during a down tern can be much better than the worry of running out of money!

    Tim

  5. fred listte says:

    Don’t rely on a credit line. It might be canceled or
    have the limit reduced just when you need it.

    Or the bank might fail…

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