For years, I’ve kept an emergency fund. This is split between an ING Direct (soon to be Capital One Direct) and Ally Demand Notes account.
Along with the emergency fund, we have money set aside for other savings goals. These include things like:
- New Car – Eventually we’ll need to replace one or both of our cars and this would be so that we could avoid or reduce a monthly payment obligation. This should probably, in reality, say ‘Car Replacement’ since new car implies that we would buy a brand new one, which in all likelihood is not something we would probably do.
- Home Repairs – Right now we have a good chunk of money in here but will probably be depleted next year when we have to replace the roof on our home
- Car Repairs – A fund that I keep for things like brake jobs, new tires, and if we would ever have to pay a deductible if there was an accident
- Cashback Rewards – When we cash in our checks from our cashback reward credit cards, we stash the money here. So far, both of the flat screen TVs we’ve bought have been funded entirely out of this account.
- Next Years Tax Refund – When we make withholding adjustments to avoid giving the government a big free loan, I stick most of the money here, and then we divvy it out come tax refund time next year. This is pretty boring and generally goes to bulk up most of the other accounts here.
There are a few other categories here, but I guess after thinking about it awhile, I’m wondering if our emergency fund is entirely or partially redundant. It seems to me that if there were an emergency, the funds could be used from other allocations to cover the immediate needs that would be required.
Let’s look at a few potential emergency situations which could require access to these funds:
Say that I lost my job. This would take away all income from our family. If this were to happen, we could tap into the fund for a replacement car to cover bills until I found a new job. The reason I would consider this is because if I have just lost my job, there is no way I’m going to be putting any thought into buying a new car, so wouldn’t that, in a sense, free up that money for immediate use?
The same goes with a medical emergency that required a large payment. If one of us were to get sick or severely injured and have a large medical bill, chances are your entire focus is going to change anyways. The ‘new car’ fund could again be looked at as that wouldn’t be an immediate need. Buying gadgets and such with the money in our cashback rewards allocation would no longer be a priority and that money could be put toward the purpose of covering us in the event of an emergency.
The Car Gets Totaled
If we were to get into an automobile accident to the point where the car would need to be replaced, the insurance company would likely give us a check for the value of the car less our deductible. We could use this to buy a similar year and model type car, or use the money in our new car fund to buy a newer car. Either way, unless there was an associated medical or legal cost involved, the subcategories that we have allocated would seem to cover most of the potential expenses here.
To summarize, if we were to change direction here, we wouldn’t be eliminating our emergency fund, we would just be giving multiple purposes to the funds that we have allocated for other items, keeping those allocations the same, but adding a secondary ‘emergency’ fund to many of the categories.
If we were to take these funds out of ‘dedicated’ emergency duty, the question would be what we would do with the money. We could go out and take a great big vacation or do a big project around the house or find some other way to spend it…but if you know me well enough, you know none of those things are going to happen. Spending the money is not an option.
We would look at doing something along the lines of:
- Investing it in a standard brokerage – This would give greater opportunity to increase the value of these funds (of course increasing the risk of losing them, as well). It would also be pretty easy to access these funds should the need arise. We could manage the money ourselves or see about setting something up with a financial adviser.
- Investing it in a retirement account – We could boost our retirement savings with this money. This would keep our net worth the same, but would reduce our cash liquidity, and the rules surrounding retirement accounts would make it so that these funds would be pretty much inaccessible for many years. There could be tax advantages or other reasons where this would make sense.
- Pay off debt – The only debt we have is our mortgage and one remaining student loan. The student loan could be paid off in full, which would free up around $100 per month. This could, in essence, be used to re-build the emergency fund over time if I wanted to stay somewhat conservative, or that money could be funneled toward investment, retirement, or saving for some of the other goals I already mentioned.
I’m a pretty conservative person when it comes to our money, but at the same time, I don’t want to have money that’s sitting around doing not much of anything if there are opportunities to grow it faster. Back in the day when the rates were 5-6%, you could justify having this money sitting there, but with the average rate between our two accounts at barely over 1%, it’s probably not even holding its value over time if you consider the effect of inflation.
Readers, I would love your opinion? Do I keep things as is, make the other funding categories dual purpose or do you have some other potential approach that I haven’t yet considered? I’m always up for new ways of thinking.