One of the key components of my family’s financial turnaround was the addition of an emergency fund. An emergency fund may be best described as a pot of money used to handle life’s emergencies while helping you avoid reaching for a credit card. In the past it was these small to medium emergencies, and the subsequent credit card charges, that seemed to keep us on the hamster wheel of debt.
Another thing that helped in our recovery was the mental, and even physical, separation of small piles of money. We accomplished this by opening an online savings account at ING Direct that allowed us to open several additional “sub-accounts.” We identified a number of unique savings goals and created an account for each one – Christmas savings, a vacation fund, orthodontic services for our kids, etc. We also recently divided our emergency fund into logical (to us) separate piles of money.
Specialized Emergency Funds
The inspiration came from a post I read over at Gather Little By Little about creating specialized emergency funds. I liked the idea of dedicating a portion of money to a specific emergency situation, and the idea folded in nicely with an earlier tweak to our financial plan to create a local emergency fund.
In this economy, it also seemed like a good idea to tag some money available to pay for things like the mortgage, COBRA insurance, etc. in the event of a job loss. Sure, the sum of these expenses could be calculated and serve as your goal emergency fund amount, but knowing I have 6 mortgage payments or 6 months of COBRA in an account helps me sleep at night!
Our Specialized Emergency Funds
- Local emergency fund. This fund represents to the first $1,000 of our larger emergency fund. Instead of keeping it all in online savings accounts, we like the idea of $1,000 or so saved at a local bank. We can write local checks for repair services, make cash withdraws, or do business inside the bank branch.
- Mortgage fund. My goal is to have exactly six months of mortgage payments saved in a dedicated account at our online bank. After watching my mom struggle to stay afloat financially after a stroke and six months of unemployment before disability kicked in, it has strengthened my desire to have this fund in place.
- Family health insurance fund. In the event of a job loss it could be difficult getting rehired in this economy. So having 3-6 months of COBRA insurance premiums sitting around would make me much more comfortable. In fact, if I ever venture out on my own, this fund could provide insurance for a few months (COBRA or a family health insurance plan I shopped for somewhere like eHealthInsurance.com).
- Automotive repair/replacement fund. We combined auto repairs and replacement funds (where I will continue sending our car payment after it is paid off this month). When we have enough saved to buy a car for cash, we’ll upgrade my wife’s current car and I’ll drive hers a while longer. In the mean time, the funds will be used to repair my old van, which has been limping along here lately.
- Household repairs fund. The remainder of our emergency fund is in a generic account we’ve labeled “household repairs.” This could cover things like a new hot water heater or a refrigerator repair.
I feel compelled to add this small warning – be careful not to add too many specialized emergency funds, and try not to confuse them with other targeted savings goals you may have. For instance, my car replacement fund really could have stayed separate from my repair fund, much like a “new house down payment” savings fund would likely be separated from household repairs.
Basically, do what works best for you, but don’t too carried away creating dozens of accounts or you will create more headache accounting for the money in the long run.