Once you’ve established your emergency fund and built it up a bit, you’ll need to decide when you should and shouldn’t use your emergency fund. If you don’t set guidelines for yourself, you’ll find a reason to use it for non-emergencies. And when you need it the most (after losing a job), you won’t have as much saved up to cover the real emergencies. Define boundaries for what you consider an emergency and what you don’t.
Job Loss/Income Buffer
Depending on your situation, you’ll want 3 to 12 months of your living expenses saved up as an emergency fund. This money is to help you cover your expenses while you’re looking for your next job. You need this money because relying on debt takes a stressful situation and amplifies it ten times over. You don’t want to find yourself digging out of debt as you start your new job. This can also apply if you are self-employed or depend on commissions for your income. You can use your emergency fund as an income buffer while times are tough so you can focus on getting more business instead of how you’ll pay the next bill.
This is where you need to decide how you’ll use your emergency fund. It’s clear that a job loss counts as a real emergency, but it’s not so clear for everything else. Medical emergencies, family emergencies, and household emergencies do happen, but there are also many situations for each of those examples that we can plan and save for ahead of time. We know that cars break down over time, so we should be saving up for car repairs even if our car is paid off. We know that household appliances break and things will need to be fixed, so we can save up for those problems.
It doesn’t really matter how you lump together or separate your savings, as long as you know they’ll cover your unexpected expenses. For example, you can have an emergency fund that covers everything. Or you can choose to have an emergency fund that’s really only for when you lose a job while you have a car fund, house fund, medical fund, and “other” fund for those costs. It doesn’t matter how you break it up, as long as you know what you’ve decided to do.
So if you’re going to have a catch-all emergency fund, you’ll want enough to cover your living expenses for a certain number of months plus some extra for all the other emergencies that will come up in life. Plus, you’ll need to keep replenishing it as you spend the money. You might decide to keep six months of living expenses plus another $3,000 in your emergency fund while continuing to add $50 or $100 every month.
Or you can go with separate accounts for everything. The number and type of accounts you use will be very dependent on your personal situation, but let’s say you have a job loss fund, medical fund, car repair fund, house fund, and “other” fund. If you own, you’ll want a larger house fund than someone who rents. If your car is older, you’ll want more in the car repair fund than someone with a newer car. If you have children or a high-deductible health insurance plan, you’ll want more in your medical fund than someone who’s single with great health insurance. Think about your own situation, the cost of a typical emergency in each category, and how frequently those emergencies occur. Then set up a savings plan to build those funds and keep them replenished when you spend the money.
Avoiding the Double Emergency
Without an emergency fund (or however you decide to do it), any emergency becomes a double emergency. Not only do you have to deal with the car breaking down, but you also have to worry about how you’re going to get the money. Every crisis adds a financial crisis because you don’t have a clear plan to deal with those money issues. Take the time to think about how you’re going to set up your emergency fund(s), what you’ll use them for, and how you’ll rebuild them after using them. It won’t eliminate the stress of the emergencies, but at least you won’t have to worry about where the money will come from. God can and will care for you in any emergency, but prudence teaches us to prepare for the emergencies we know we’ll face.
The prudent sees danger and hides himself, but the simple go on and suffer for it.
Proverbs 22:3 (WEB)