On the importance of an emergency fund (and targeted savings funds)
When I published a Q&A about investing, several readers left comments pointing out that the first order of financial business is to set up an emergency fund and then worry about investing.
Which I totally agree with! Don't put the cart before the horse, readers. Save first, then invest.
But I realized that I haven't talked a whole lot about emergency funds before.
Long story short: I think they're crazy important and you should make them a very high priority.
Longer version: the rest of this post.
Frequently, people get into debt because unexpected expenses crop up. If you don't have a savings account or emergency fund, you have to go into debt when your heat pump dies or your car needs new tires.
It only takes one thing going wrong, and boom, you're spiraling into debt.
One predictable thing about life is this: unexpected expenses will hit you regularly.
Which means that they're actually not all that unexpected! The mystery lies in exactly what the expenses will be for and when they'll arrive.
But their existence is pretty much guaranteed.
So.
If you want to stay out of debt, you really need to have a plan for paying these unpredictably-timed expenses.
I have two ways of dealing with these, because I feel like unexpected expenses fall into two categories:
One:
-unexpected expenses that may never happen (unemployment, a huge medical bill)
Two:
-irregular expenses that are basically guaranteed to happen (car repairs/replacement, home repairs)
For the first category, I have a general emergency fund. It's been in place for almost ten years, and we haven't actually needed it yet! But it's a good feeling to know it's there.
For the second category, I have specific savings accounts.
Every month, money automatically goes into accounts like Auto Maintenance, Home Maintenance, Auto Replacement, Orthodontics, and so on.
So, when these not-really-emergency expenses come up, there's money set aside for them and I don't have to tap into our emergency fund.
That way our emergency fund is safely there in case we have something that's a true emergency.
How should you get started?
If you don't have a savings account at all, I'd recommend focusing on establishing a general emergency fund. I know it can be super hard if your income is low, but usually, it is possible to squirrel away some money each month.
(Here are some ideas to get you started on building an emergency fund this month!)
When we were in our poorer stage of life, we didn't build targeted savings accounts, but we did have a general emergency fund.
We never managed to get more than a few thousand dollars in it before it got depleted (Oh, heat pumps! Why must you die??), but it did the job of keeping us out of debt.
Once you have several thousand dollars in the emergency account, then you could work on establishing some Unexpected Expense accounts, bit by bit.
I highly, highly recommend automating this process. If you decide, say, that you're going to put $50/month into your auto maintenance account, set it up to happen automatically.
It's way too easy to forget to do it manually, and if it happens automatically, somehow it feels a little less painful.
Something is better than nothing
I know that financial experts tell you to get a year's worth of expenses in the bank (on top of maxing our your 401(k), fully funding your kids' educational accounts, and who knows what else).
And I know that can feel super overwhelming, especially if you don't have tons of money to work with.
But here's the thing to remember: any saving is better than none!
If you have enough in your emergency fund to pay for half of your car repair and you have to finance the other half, well, at least you didn't have to finance the whole thing.
If you have enough money saved to get you through one month of unemployment, that's so much better than having nothing saved.
So, start small, and give yourself a pat on the back for any emergency fund saving that you do. It matters, and you're not going to regret it!
First, may I just state again how much I appreciate your practical, accessible approach to financial matters. It does feel as if the financial services industry pushes certain things, probably because of a profit to be made, and neglects to highlight some of the most important things. Mostly I see advice that starts with a brief mention of emergency funds, but then goes into great detail about various retirement, college savings, investing plans, etc. I think you're right on the mark here.
Second, I totally agree with doing whatever you can when you can. My four children all have savings accounts that I set up for grandparents to put birthday money in (my request in lieu of more toys that will be thrown away within months), and I also add dribs and drabs of money as it comes--the cash back on our credit card, for example, gets distributed among those, as do any loose change hordes when I bring them in to the bank. It's surprising how such small things add up over a period of time. I'm not suggesting trying to save for a new car with loose change, but small things do matter.
One big tip is to keep any savings away from your "regular" money, especially if you're just starting out or tight on cash, so that it's not as visible/tempting to get into it if you don't really need it.
At Wells, I have a checking account, a linked account for my son's soccer expenses, and a "slush" fund that I move a little bit of money to each check and use for stuff like bday gifts, unplanned dinners out, entertainment expenses, random one-off expenses that aren't part of the normal budget, and if there's anything left at the end of the pay period when I re-up it, I move it to a vacay fund 🙂 I use the 360 accounts for the higher cost one off expenses, because they direct debit from my account and are easy enough to transfer over if I need it for something from those expenses. For our efund, we have it at a local credit union- I don't have the capability to just go online and move it over, nor do I see it on a regular basis (unless I intentionally go to check on it), so it's out of sight, out of mind. If I NEED the money, I can get to it, but it's not so visible that I tend to think about it as "extra" money.
Now, we're not on such a shoestring, but when we were, our contributions were teeny tiny, what we could when we could, and grew as our income did. One thing I always did (and still do) is that if I were going to buy something and "saved" X amount of money with a coupon/discount code, I would move the amount of savings to an actual savings account. It's not really saving if you spend the money on other stuff. Now obviously if you need the item and can only afford it with a discount, that's a different story, of course! And I have my checking account set up that for every debit/ACH transaction, it moves $1 to a separate account- we use this to pay part of the kids' recreational activities, (which mostly equates to my son's club soccer dues and tournament fees!).
I agree with Rosie! Unless you use something like YNAB (and understand that the balance in your checking account is not just free money to do with what you want and every dollar is actually assigned somewhere), separate accounts are the way to go.
I initially had separate savings accounts for many categories: gifts ($40/month so that I could have $$ for Christmas, birthdays, and such over the year), clothing, car maintenance (also doubled as new car savings once I paid off my car and flipped that payment over to that account), car insurance, vacation, etc. I switched over to YNAB recently and consolidated those separate accounts and keep track of them with the software instead.
I actually serve as a money coach to some friends and I can say actually establishing separate accounts are easier for a lot of people to wrap their heads around at first. (It's really easy to do with credit unions and online banks like CapitalOne360.) It's like an interest-yielding version of the envelope system suggested by financial experts like Dave Ramsey.
I would add that you should discuss with your spouse what your family agrees on as an emergency before it comes up. When my husband first started to see our savings grow he wanted to spend it on EVERYTHING. It took a lot of discussion for us to agree that vacations, tools, going out were not valid reasons to dip into the EF.
I was getting huffy at the beginning of the post so was pleasantly surprised when you highlighted that many emergencies are not really unexpected! I’m am absolutely not perfect at this but things like car tyres, new sofa or computer etc are things we know we’re going to need at some point. We’ve tried to figure out annual costs then put money aside each month in a savings account so we know the money will be there.
On our financial spreadsheets the emergency fund is a line on its own and doesn’t get counted as part of our assets. It doesn’t exist as real money that way which means I’m less likely to rely on it or think it possible to spend it on things like new car or house deposit. I’m going to try to keep thinking of it that way.
We have an emergency fund too. You never know when an emergency is going to strike. The best thing we can do is prepare for it both emotionally and financially.
I tend to get super stressed out when we have house repairs and tend to take it out on Mr. FAF. It's totally unhealthy for our marriage, and I'm trying to change that.
I wanted to encourage those who don’t have a lot to work with ... in college (we went back later in life with kids) we always had plans for pursuing Dave Ramsey’s financial peace checklist but we never, ever got beyond the “save $1k for emergencies” because we had to keep refilling that basic emergency fund. But ... we got through college without any credit card debt. We never had to debate whether or not to go to the ER in the middle of the night with a sick kid because we wouldn’t be able to pay for it. So even though at the time it felt like we made no progress, looking back I’m so proud of us. So yes! You can do a lot with just a little
I agree with the automated savings being the way to go, if possible! When we were first married and working outside of our home, I had a set amount going into saving and retirement each paycheck. I came to not even miss it, and almost forgot it was there! I'm still amazed each quarter when I get the retirement statement...23 years after I stopped contributing. I know I was fortunate to be in a place where I could do this, and not everyone can, but every little bit DOES add up! Now we are self employed dairy farmers, and it's much more complicated...we don't even know how much tax we will owe each year until late Feburary...but these guidelines are a great way to keep the emergency funds going.!
Well, just a wee tid bit for those of your readers who may be Canadian. Some of us may put emergency savings into an RSP. But folks don't realize that if and when you need to access those emergency funds from within an RSP that you are going to get a nice slice cut off first for the gov.'t, right off the top of your cash withdrawal as an "early redemption" penalty. I think the amount is currently around a 10% penalty. So it would be a better idea to find another type of savings vehicle than an RSP.
Perhaps in "American" vocab, 401K's have the same type of penalties for early withdrawals?
My best advice is to break your spending/savings up by pay period. If you receive two paychecks per month, I like to try to use the first paycheck for fixed expenses and the second paycheck for discretionary. This really helped me to make sure I wasn't overspending on committed costs. I lived in a cheap house with a roommate and drove a super old paid off car because my first paycheck of the month couldn't absorb a car payment or a nicer house.
The second paycheck of the month is discretionary spend like groceries, gas, Netflix, and savings. Maybe I want to take a vacation soon, so I make sure to spend less on groceries. Some months I could save a lot of cash and other months all that was left at the end was $5. The key is to not go negative!
Keeping my fixed costs low was always key to being able to save money in my emergency fund. It's really hard to make traction forward if 75% of your money is used up before you even buy groceries for the month.
I know the feeling of "struggle to build up the fund, watch it get wiped out" and it's frustrating, but one does have to remember, the money was there when you needed it. What's hard is when one has a small income, builds the fund slowly, an emergency happens to take most of it, and then another emergency comes along before the fund is built back up, and that one requires financing to handle it. That's when it really feels like going one-step forward, two steps back. But again, at least one didn't have to finance both emergencies. And yes, car repairs, replacing appliances, that sort of thing, aren't emergencies. I have savings funds that I dump a certain amount of money into each month, in anticipation of house insurance, car replacement, Christmas, etc. I earmark those funds on a memo when I transfer to the savings account. I also have a "trickle" fund -- a small amount each week automatically comes out of my checking into savings, just to increase that fund for general unexpected emergencies.
Except for 10 years of his working life, my husband never made much money, so putting savings aside has always been hard for us. It's vital to find any way possible to cut expenses, sell things, put $5 a week in there, whatever, to have an emergency fund, though, or the debt problem only gets worse.
Currently I am extremely thankful for emergency savings as my husband is in the middle of being off 3 months for shoulder surgery. Granted his work has short term disability but after insurance, taxes, FSA, etc. there isn't much left. Saying that we are in a different place most of your readers probably are, close to retirement with investments, but emergency savings were & have been a saving grace when our daughters were little.
Starting with whatever you can deposit is key and it is certainly much less painful if you have it taken out automatically (just like taxes;-) Ally is another great online bank that offers a slightly higher rate than Capitol360 (we have accounts at both). Make use of them & before you know it you will have the Dave Ramsey recommended $1000 in your fund. This is doable!
Dave Ramsey is the bomb!!!
Dave Ramsey helped us change our lives!
For smaller emergencies, I have a quick tip I learned from a co-worker: an emergency twenty! As in a $20 bill you keep hidden somewhere for minor emergencies right before payday, like a gallon of milk, a few dollars of gas or the $5 for the school field trip or box of girl scout cookies you forgot you ordered. It's great for when you have a small unexpected expense and your wallet is empty or your debit card is tapped out. If you use the $20, always replace it as soon as you get paid.
YES!!
Completely agree on this. I have one in the car and one in the house that nobody else knows about.
Me too. My husband cleaned out my car for me once and found it. I told him it was there on purpose. All of our cars have it. Guess I forgot to tell him. Oops!
Great idea!! You can keep it in the glove compartment.
This blog does a great job of providing useful, relevant and practical advice on how to have a quality lifestyle without overspending. This is another excellent article. However, I would agree to disagree on this point:
"One: unexpected expenses that may never happen (unemployment, a huge medical bill)"
I would say that in one's lifetime, and perhaps in more than one instance, one or both of these is inevitable in this day and age. Unemployment in this day and age is virtually guaranteed at some point, no matter your age, no matter your education, no matter your experience. And the difficulty of finding a job to replace one that provided an income that may have been sufficient to support normal expenses and savings may NEVER reappear.
You should have a minimum of six months of your current income in savings. This is in addition to any regular savings and/or an "emergency" fund.
As for medical: If you do not have (and that means you can afford it, rare these days, especially for a family) really good coverage in medical insurance, and sometimes, even if you have, you can end up in huge debt. In fact, there have been articles noting that medical debt is the largest debt most people incur in lifetimes. Way beyond credit card debt in many cases.
Make the best insurance you can afford a priority. And if you buy one with a high out of pocket deductible, make sure you have that amount available in any savings or emergency fund.
The other issue to consider, depending on your income and type of job, is private disability insurance. It's not easy to get, it may have too many limitations and it may be too expensive. But if you are the sole or primary income generator for your family, you should at least investigate this option. And forget about Social Security disability: Most people will never qualify
You are so right about that Irena. When my husband and I married, we were two young, healthy, easily employable people. Years later, we both have health conditions -- he was diagnosed with juvenile diabetes soon after we were married and I was diagnosed with an autoimmune disease about 15 years ago -- the company he worked for had to close due to the 2008 debacle, and he was too old to find another job easily, plus his health kept him from taking the only offered job, which would have demanded a lot of travel. He was too young to draw retirement. We were living on my little salary and our savings, and in that time period before he could draw any money without penalty, his insulin pump had to be replaced , our air conditioner/heat pump unit got struck by lightning, the washer quit for good, the dishwasher motor fried, our well pump had to be replaced, and our rather old car needed repairs worth more than the value of the car.
These days, never assume one can always work and earn the needed money. Save while you can!
I just had to use what I actually call my "panic/emergency/WTH just happened" fund because I broke my ankle last week. After I got the out-of-pocket quote from the lab doing my CATscan (I did an excellent job of breaking my ankle), I transferred the necessary funds to my checking. Quite the contrast to when I broke my wrist a year after college and just stopped paying for anything that wasn't food, rent, or bills.
I also have two other saving accounts for annual/biannual expenses, targeted savings, and extra payments on my student loan.
During college, I only had a checking account and my emergency fund was the minimum amount I kept in it. It started at $500 and, eventually, I was able to get it over $1000 after college. If I went below that minimum I'd stop spending money on anything that wasn't absolutely necessary. I still keep a minimum for times when I don't have time to transfer money from a savings account, such as, "we were able to schedule you a CATscan for 3pm".
I would advise everyone who can to convert slowly some of your emergency fund into backed government treasury bonds so you can be guaranteed it will pace with inflation. There are rules to this and you have to wait a year before touching but that's why I suggest slowly convert it through a few years, then your money will never shrink!
But then it's not liquid if you have to wait a year to get it out. Emergency money needs to be able to be gotten to immediately.
I'd guess that it must season a year before it can be accessed without penalties, hence the wise advice to do it slowly. Creating a ladder so that with time, there is always penalty-free money available is pretty clever. Hedging against inflation is always important. Great tip, Lily!
What bank(s) are you using for these multiple targeted savings accounts? Do the fees add up from having so many?
CapitalOne 360 is one bank that allows this. (It used to be ING bank.) They offer great rates, and you can create as many accounts as you like. You transfer funds into and out of it electronically, so the transfers take a few days. No fees that I've encountered.
Like any savings accounts, there are limits on how many transactions (6) can take place within a a given month, so you can't go CRAZY putting money in and out of accounts, but if it's typically just a once or twice a month automatic withdrawal, there are no issues.
Yep, I've never needed to make more than 6 withdrawals from my accounts in a month.
I have multiple savings accounts at my credit union. I can have as many accounts as I want.
Agreed. We had a summer where the air conditioner went, the water heater went, and we had to have an enormous tree taken down we were feeling pretty low. I can't remember how we made it all work out, but we did have a small savings account, and we had the water heater and the air conditioner (which I think we did a temporary fix on) from the same company and they let us pay for the repairs in smaller payments without interest. It pays to be repeat customers who reliably pay their bills. The tree people did the same thing, probably for the same reason. We are in better shape now and I think we have a good emergency fund and I have started saving for a new car. I hope the car I have lasts 7 years, but I have a good chunk saved for a good used one if it doesn't. The savings feels really good. Thanks for your thoughtful practical advice.
One thing my husband and I have always done is save all our change - we don't spend it at all. Dump it every day into some designated container, and once a month, wrap the coins and deposit then in the emergency fund. It's amazing how much you can save doing this, in addition to having a set amount saved every paycheck. Pay yourself first!
Agreed! Everyone has an opinion about how you should manage your money. We didn't have a year's worth of expenses in savings when we got out of debt, but we did shoot for $1,000 minimum. We wanted a savings cushion just in case we had unexpected expenses while paying off our credit cards.
For homeowners who have their Emergency Funds and are working on their Life Happens/House Targeted Fund, I have a recommendation: don't stop contributing to the House fund.
When I bought my house, I calculated how much I wanted to save annually for Big House Costs. I didn't need any for 13 years. Thank goodness I kept contributing because in one year the AC needed a big fix, the furnace needed replacing, and the washing maching needed replacing.[1]
Had I stopped after saving the cost of one big repair, I would be in a big hole right now.
[1] Specifically, it needed an expensive repair. As I was researching the matter, I learned that this particular make/model was prone to breaking down and would like need more expensive reapairs before it finally died. So I killed it instead.
I used the bi weekly pay system to my advantage. Allowed myself only 2 pay checks per month to live on and the two extra checks per year went into emergency fund...never touched it. It might mean a week of sardines, toast, eggs, ramen, but so what
Similar to Bobi's comment about the emergency $20 - I'd keep some of the emergency fund in cash. Example of when it might be used: my brother moved, didn't have enough to pay the movers, didn't want to spend time going to the ATM and getting cash (because you have to pay the movers for that time waiting, too), but wait! Emergency cash! $200 was in the freezer with his passport! Also useful for those times when the power goes out but you still need to buy things.
I remember the day so many years ago when my emergency fund reached $250...the next day - literally - the computer in my car died, to the tune of $243. I wanted to cry, but at least the repair didn't have to go on a credit card!
We've always done the "pay yourself first" trick to make sure we got at least a few dollars each pay into savings. It wasn't much in the early, lean years, but it was something. One twist on that, which also kept us from lifestyle inflation as time went on and helped us to rapidly grow our emergency and other funds, was to direct deposit our pay into savings, and then have exactly what we budgeted automatically transferred into checking. At first, when money was tight, we would increase our checking deposits as we got raises. But before long, we were managing ok so we stopped increasing what moved into the checking account with each raise. It was staggering how fast the emergency fund grew at that point.
Back in the day when just starting out, things were so tight that we could only afford to fund our er fund with $5 every 2 weeks. It felt like we would never get there so what’s the point. Well the point was to get in the habit of saving which was so valuable to us. It made it easy to add a few dollars when we could and really instilled the habit of saving for us.
Way to start with what you can!! I think doing something always leads to more and gives you the mindset that an er is important. Doing Better, Not Perfect is kinda my motto.
Good job Trish..to establish the habit of saving with $5. Those who learn to plan, and establish good habits know better how to handle the $ increases that may arrive in the near future with no advance notice. The same rule would apply, in my humble opinion, with investing. Starting off investing with even small dollar amounts can amass a great fortune with steady stable investing. It is those who postpone saving and investing until they are really "established" that miss the boat because they haven't built up positive character and smart strategies from dealing with smaller dollar amounts in their lean years.
I was watching a documentary the other day on the telly, and the film described how most people who wind up accessing these "pay day loan" types of places are usually only there for small $ amounts of no more than $200-400 canadian dollars. Then they get trapped into the pay day loan trap and can't get out. When someone has even a modest stash of emergency cash, that can protect them from ever falling prey to the lure of pay day loan places.
Great advice! Emergency funds give so much peace of mind and free up the brain from having to worry about finances.
We have automatic withdrawl to a bank separate from our everyday banking accounts.
Like others have mentioned above, when you don't see that $$ everyday it's easier to leave it alone.
Also, I find that having it at a separate bank puts an extra step into moving the money to be used and the inconvenience is a spending deterrent as well.
I think you mentioned this with the $1000 fund you kept, but having something rather than nothing is where to start.
Don't be discouraged if all you have is $20!
Keep setting aside that $20 every month until you can afford more and even that will make a big difference!
My emergency fund is at Tangerine (Canadian equivalent to Capitol 360) and since they don't have any fees, I can even make my transfers weekly... so just think $20 every week might feel easier than $80 a month!!
The other thing I would say would be to be careful about abusing the emergency fund. It's not for a new winter coat or boots. (Even of yours isn't in the best shape) Being creative about fulfilling needs and wants with a more frugal and contented outlook will help curb the "emergency" spending.
I applaud your efforts. I want to mention that humans tend to stick with the path of least resistance. When someone has to physically go into a bank and deposit some cash into a certain account, it takes time and effort . You have to figure out when the bank is open, when you aren't occupied with work or something else important, and you have to have the time to stand in line with a teller if you don't like to use ATM machines. All of those actions require time, decision making and effort. And THAT in a nutshell is why many people fall behind in their good intentions to build up an emergency stash of funds. They have made it too awkward and time consuming. Therefore, I applaud that you are putting your savings in automatically into an online bank instead of into a physical branch style of bank. You don't even have to try to remember to add savings into your emergency fund account because you have set it up to automatically deduct from your regular account. Reducing stress and streamlining your savings with a handsfree automatic strategy is exemplary.!
I love all this financial talk. At one point I had $20,000 in my emergency fund. I had worked for a hospital as RN for 20 years and got fed up one day and walked out after my shift. I took 3 mos off that summer of 2015 to reevaluate my life and then got a new job. Now every year my Tax Return goes into my emergency fund that now has $11,000 in it. It is socked away at a credit union that I never use so I am not tempted to use it. At this time I am making very little,but am able to have some extra money put into my checking acct. I have always lived well under my means,but I am glad to have what I have. I can sleep well at night.
I guess our emergency fund is our savings account. I have not really thought about these things since college, when I would physically take every $20 bill that was left over after a month in the checking account and deposit it in a separate bank. Then I bought a CD with the savings account. Back then there were rates at 7 percent. I miss the process of being un-automated, although I agree with you it is easier to just specify an amount and forget about it.
I have focused only on reducing expenses. Mind the pennies and the dollars take care of themselves. I'm always thrilled to learn about cheaper cell service, Hello Ting!, and add to my list of things I just don't pay for anymore, like cable television.
I think the true emergency that is nearly impossible to prepare for is catastrophic illness and long term care. I shudder to think of paying five thousand a month to a nursing home, even if we save enough to afford it.
We have a dedicated emergency fund that would cover at least 3 months of our expenses. According to some, that may seem a bit low, but we also save religiously for all of the expected "emergencies" (new roof, new car, med bills, etc.).
We are HUGE fans of You Need A Budget (YNAB). We've been using it for 11 years. It allows us to keep the number of accounts we have to a minimum, while still keeping very good tabs on our money and what we want to do with it in the future (as well as recording what we've done in the past). I'm not affiliated with them in any way, other than being a happy customer.
To anyone who is struggling to get a hold of their finances, get out of debt, and/or build an emergency fund, I highly recommend checking out YNAB, maybe even trying out a free class. They also offer a month-long free trial. Additionally, if you're in college, I think you get a year free, or something like that.
Yep, all students (even grad students) can get a free year of YNAB! Another happy customer here. 🙂
It may be obvious, but it’s key to know bank policies on withdrawals and transfers! We had to buy a new car in a short time frame (hello, Christmas road trip and bad transmission!) and long story short, had to finance to get the car in time all because I was misinformed by the online chat help at Capital One about how to get a cashiers check. It all worked out, but big emergencies may not wait several business days when you need them to!
Good point - I ran into a moment of panic where I thought I'd have to delay the closing of my house because I misunderstood something regarding one of my accounts there (plus the fact that it needed to be a wire transfer)... Whoops!
We have an emergency fund and a savings account. Actually we have several savings accounts and bank at a regular bank, no fees. My husband went back to school to get his masters degree full time. He had a stipend for research for two projects that we could just live on. (500 square foot apartment and one car with very frugal living) we also had a child during that time. Then as he was finishing his thesis his stipend was cut in half due to nasty politics. We had to use that true emergency fund for three months until he could finish his thesis.
It is true, you never know when but you will need it. When he started his job we continued to live so tightly to build up our ear fund again. Some of it is in cash.
We also bought a car for cash, saved up for it. We were grateful that we didn't have a car payment during those lean months! Now we are "making ourselves a car payment" to save for the next car; get that tiny amount of interest coming to us instead of the bigger cost of financing.
That's a great idea Heather to "make yourself a car payment" in order to form strategy to pay for your next car in cash. i had never heard someone describe that strategy in quite those words. Good for you for resisting the temptation to finance a car with debt. Congrats 🙂
We have four bank accounts - checking, savings for my husbands Roth IRA, a more targeted/short term savings account, and an emergency fund savings account. On payday, we have it set up so everything over x amount of our paychecks go into the short term savings. We set this up ages ago when the amount saved was a small amount, but multiple pay raises later, it amounts to 20-25% of our paychecks. Whenever the short term account grows to cover a months worth of expenses, we move the months worth of money into the emergency fund - that typically happens once or twice a year, often coinciding with tax returns and/or the months with 3 paychecks. We're fairly liberal with how we use our short term savings, and incredibly stingy with our emergency fund. Short term expenses cover travel, budget overages, unnecessary home projects, decor, etc - nonessentials that must be paid for in cash. The only acceptable expenses for our emergency fund is job loss income replacement, essential car and home repairs, travel for funerals, and medical expenses. We don't tap into the emergency fund for irregular expenses can be covered from the short term savings and/or trimming our monthly spending. So, last year we paid for expensive travel to my aunt's funeral, tree trimming, unexpexted repairs on our 17 year old car, and replacing our water heater without touching our emergency fund, even those were eligible emergency fund expenses. Since setting up this system with the automated savings and the short term buffer before the going to the emergency fund, we've never had to touch our emergency fund.
We have a 4 month EF, a savings account, a projects account and a college account for our kids.
-College account is money for our son's school, books, gas and food for him. We are really focused on this account right now because our daughter is a junior in HS so we will have 2 in college soon.
- Projects account pays for work on/around the house and cars.
-Savings is for usual stuff: clothes, regular medical bill, taxes, home owners insurance, holidays, birthdays, vacations. Things that we know are going to happen every year at the same time. Dave Ramsey says Christmas is always December 25!
- EF is for job loss/medical that can't be funded from regular savings or deaths. We want to get this to at least 6 months.
We keep some money in a big branch bank and some in a credit union to cover ourselves. All 3 of our kids have an emergency fund of at least $1,000. They don't touch it and have it for when they go out into the real world. Our oldest lives out of state. She thankfully has never needed to touch it. She said she doesn't really think about it. She is currently saving money up to move into a new apartment.