Comments on: Your Emergency Fund: What Qualifies as an Emergency?

By: Mike

Mike — Wed, 17 Dec 2008 11:18:57 +0000

There’s a pretty simple rule of thumb: if you’re going to call it an “emergency fund,” then you should have absolutely the most restrictive possible definition of “emergency.” Otherwise, you’re kidding yourself.

So long as you maintain an absolutely rigorous, restrictive, narrow, conservative definition of “emergency,” it’s perfectly okay for us to agree to disagree on specifics.

Then again, there’s another solution that I prefer. I refuse, simply as a matter of good practice, to spend more than 40% of my income each month. And in a true emergency, I could cut back. Generally speaking, whatever is left from last month’s paycheck is automatically a 1-month (minimum) emergency fund; and unless I were to suddenly lose my income stream effective a month ago, next month’s paycheck would cover at least a couple more month’s of expenses. This kind of set-up is hard to work out overnight, but if you plan well there’s no reason you can’t get there within 4-6 years. And it really does make life a lot less stressful.

By: qwelikablob

qwelikablob — Fri, 31 Oct 2008 20:49:25 +0000

Most things needs maintainance and eventual replacement at some time, but that can be planned for by putting some money regularly into a savings account. I think that using an emergency fund as a maintainance fund for predictable expenses is defeating the purpose of the emergency fund.

By: Jason Beck

Jason Beck — Thu, 28 Aug 2008 16:09:34 +0000

I tend to play devil’s advocate, and I apologize if it seems offensive :)

But I think your post really only touches on the obvious ends of the spectrum. What really needs light shed on it are the areas in between that are less obvious. My recent example was that my aging air conditioner/heat pump gave out. Repairing it was risky because the whole system could’ve failed in another year and I’d still need to pay for the replacement. Adding to the complexity was that one room was using a thirsty window unit but I could get vents installed along with the new unit for a small additional fee. And with electricity rate caps coming off in the next couple of years, the much more efficient modern unit will save money over the older unit. But all that aside, to pay for this unit, the money had to come from somewhere. And, in fact, it was really more than my emergency fund!

For me, I found it made sense to refinance the loan on my 1 year old car, increasing the loan from $6000 to $10000 at 3.49%.
The electricity savings have already been quite apparent (and a renter of mine agreed to pay $50 more per month now that his room doesn’t have a noisy window unit.) I quickly restocked my emergency fund with $1000, but because I’m an optimist that likes to believe that one big expense isn’t likely to be followed with another unexpected one I wasn’t too worried during the few weeks that it was empty.

Anyway, I’d like to see more ideas and examples of things that may not qualify as an emergency. (Really, I could’ve gone without AC for a while, though going without heat might have been a bit more problematic!)

By: The Money Answer Guy

The Money Answer Guy — Wed, 20 Aug 2008 03:36:58 +0000

Interesting light shed on what constitiutes as an “emergency” in order to withdraw from your emergency fund. I think most people have different outlooks on what constitutes as an emergency, which is why some people can actually maintain and contribute to an emergency fund on a consistent basis. I think a lot of people struggle with the amount of money that should be socked away into an account in the event of an emergency.

By: mppaul2

mppaul2 — Tue, 19 Aug 2008 01:15:31 +0000

Well, my modem died this weekend and considering I work from home two days a week, that definitely put this act in the emergency column…so off to best buy I went to pick up a new $100 modem and I’m back up :-)

I did put it on my AMEX Gold, but that’s a for sure pay off with emergency funds in 30 days.

By: Evan

Evan — Mon, 18 Aug 2008 15:43:38 +0000

@KC,

I couldn’t agree more…if/when I have 6 or more months of cash built up, something as simple as an unexpected dinner could give me the permission I need to invade it…with the knowledge that I will have to start weekly additions again.

Also another question for everyone out there, What do you do with the income thrown off of it? Currently, I am using all interest towards debt, but was curious what others were doing.

By: Brad

Brad — Mon, 18 Aug 2008 15:42:13 +0000

I agree with Yana… I ended up having to get surgery about a year and a half ago, out of the blue… it was nothing crazy, but ended up costing me about $4000 after the insurance paid its part. I could have blown away the whole amount over a few months or drained the emergency fund, but decided to make smaller monthly payments. So I called the hospital, worked out a payment plan and have been paying it interest free and penalty free for the last year. In 2 months it’ll all be paid off and I was still able to put money away in savings and not kill the emergency fund in the process.

By: KC

KC — Mon, 18 Aug 2008 15:04:10 +0000

I think it depends on the depth of your emergency fund as to what constitutes an emergency. Surely if you barely have a month its going to take one helluvan emergency to use that money. If you have 4 months saved up you might be much more willing to use that money when the fridge breaks down or some other minor emergency.

By: Yana

Yana — Mon, 18 Aug 2008 14:56:08 +0000

I agree that job loss and surprise tax bills are valid emergencies, as well as certain medical/death expenses. But one should try hard to find a way around the latter, by trying to minimize those expenses and finding a different way to get them paid. Car repairs or replacement are another valid emergency.

By: Ryan

Ryan — Mon, 18 Aug 2008 14:53:58 +0000

When we were building our emergency fund we had a very similar discussion. To us, most situations warranting tapping should be an uncontrollable sudden event or situation that we couldn’t plan for and thus, in order to avoid the assumption of debt, emergency fund cash should be used. It is also a stupid tax buffer and provides a shield as we learn how to adequately plan and navigate the beginnings of our life financially.

By: Flexo

Flexo — Mon, 18 Aug 2008 14:05:17 +0000

Evan: I’m no expert so this is just my opinion based on the limited information. Having two-months’ expenses in your emergency fund puts you in a good position to focus on your debt, particularly if you feel you can recover from an emergency quickly. It’s always a balancing act when you’re eliminating debt at the same time as building an emergency fund. It’s better to build a small cushion first, as you’ve done, then attack the debt and fill out the emergency fund when possible. A lot depends on the amount of debt, the interest you’re paying, and your aversion to the risk of lack of income.

Good luck!

By: Evan

Evan — Mon, 18 Aug 2008 13:55:06 +0000

Flexo,

Question for you,

I am in a situation where I have a good amount of liquid dollars, but also have a good amount of debt. In an effort to eliminate the debt I stopped saving for my emergency fund (i probably have 2 months or so, but REALLY want 6 or so months) and then combined your debt avalance and the debt snowball attacking the debt with all free dollars.

Do you think this is a good call, or should I split it down the middle? or build MY emergency fund the way I want first? Any info would be great…