Recently, I’ve encountered a $1200 expense that flew out of nowhere. I am choosing to pay this in installments (potentially on a credit card), instead of dipping into my emergency fund. Why? Because I think an emergency fund is for emergencies only.
Emergency Fund 101
An emergency fund is a set amount of savings (different from your general savings) for a crisis, so that you don’t have to turn to a credit card, payday loan, or worse, your mother. Your emergency fund number should be based on your monthly expenses, not your monthly income. So if you need $2000 each month to pay your bills, you have to decide how many months of savings you need. Suburban Dollar recently had a great article on emergency funds. It is important to consider the likelihood that you and your significant other will both be unemployed, how close your kid is to needing braces, etcetera, before you decide on your magic number.
My magic number is two months total expenses, at least four months rent. Why? Because it’s my comfort zone. The “baby emergency fund” of $1000 promoted by Dave Ramsey kept me up at night. I also don’t see stock piling 6 months of expenses ($12000), when that would pay off all of my credit card debt!
But What Is An Emergency?
That was the recent debate for my husband and I. Did either his car needing major repair, or my need for tuition constitute an emergency? Not really. We do have a second (although gas-guzzling and in need of substantial upcoming repairs) car. I do qualify for a basic administrative position outside of my field. While the income difference is huge, and it would mean not taking advantage of paying clientele waiting for me to be licensed, that tuition would not be the difference between us eating and starving.
We did have the cash to pay for either one out of savings, but not both. We would have the money within the next few months to pay for both.
Originally, we were going to scrap my husband’s car, but where else will we find a reliable car for $1500? And I found out that the college I’m looking at will allow me to pay my tuition in installments, allowing us to do both. We do have a 0% on purchases credit card as backup during this transition time.
We had the money in our emergency fund to cover both. Why didn’t we use it? Because these are not emergencies. That emergency fund is the last “hail mary pass” between my family and starvation and homelessness. Nothing else qualifies. I like my husband’s car very much, but I have no desire to live in it. Nor will my tuition pay the electric bill.
What each person defines as an emergency is based on their own principles. Since we lead an extremely simplified life, what some would view as emergencies, we can do without. I knew someone who used to view the Nordstrom shoe sale as an emergency. I love a pair of leather boots as much as the next girl, but that’s what a savings account is for, not an emergency fund.