The emergency fund: simultaneously the most useful and least descriptive financial tool there is.
We all know emergency funds are meant to handle life’s curve balls. But the term “emergency fund” is so broad that it leaves us pondering:
What constitutes an emergency – and what illustrates a pattern that could actually be planned for?
Most financial advice that broaches the topic of emergency funds fails to address this important question. The result? We build up our emergency funds only to dip into them more frequently than planned – and for “unexpected expenses” that were actually quite predictable.
If all we ever do is use our emergency funds and then rush to rebuild them again, then there’s no way we can get ahead financially. An emergency fund is just the first of many important financial goals, so anytime we ping pong on our progress, we’re getting set back on all of our financial potential. That’s why it’s so important to understand what an emergency fund is really for.
What Constitutes an Emergency
It would be a little too simplistic to say that what an emergency fund is for is emergencies – the reason being that any kind of unplanned expense can seem like an emergency in the moment. So let’s talk about what actually constitutes an emergency:
An emergency is something that could not have been anticipated.
If your brand new car breaks down and you have to pay a mechanic to fix it, that’s an emergency. If your ten year old, several hundred thousand mile car breaks down and you have to pay a mechanic to fix it, that feels like an emergency but could have been anticipated.
If your otherwise perfect health suddenly tanks and you have to go to the doctor, that’s an emergency. But if your chronic condition flares up and you have to go the doctor, that feels like an emergency but could have predicted.
What I’m getting at is that there are expenses that pop up that could have been predicted, which makes them irregular expenses. Irregular expenses are not the same as emergency expenses – if you plan ahead for them. Emergency expenses pop up out of nowhere, while irregular expenses come up somewhat frequently, but not monthly. Irregular expenses can be hard to track, but they should not regularly eat up your emergency fund.
Irregular Expenses Are Not the Same As Emergency Expenses
It’s hard enough to stay on top of a fairly predictable monthly budget, so it’s not all that surprising that irregular expenses end up in the emergency category. But if that happens over and over and over again, then the emergency fund looks like this:
instead of this:
If you want your emergency fund going up and to the right (until it’s fully funded), then you’ll need to start planning for those irregular expenses. Remember, irregular expenses are not the same as emergency expenses.
Finding Patterns and Predictability
So how can you plan for irregular expenses when they’re so…irregular? Find patterns and predictability wherever you can. For example:
If you have a car, build up a mechanic fund. If you’re suffering from a health condition that requires more than one annual visit to the doctor, start building up a medical fund. If you have a pet of a breed that has known health problems, save up for a vet fund. If you have children, save up for a whatever-crazy-thing-happens-as-to-be-expected-with-kids fund.
You can plan find patterns and predictability by evaluating what could come up in your life and getting ahead of it with a specific budget just for that. That’s not to say you should be paranoid, just realistic about certain things. Here’s how you can do it:
- Take a close look at your lifestyle: Are there ways you end up spending more than expected more often than planned (such as dinners out when you work late)? If so, adjust your budget to reflect that spending and make room for it.
- Take a look at your family: Do you have dependents? Are there things that you know will come up that you’ll have to pay for in the next few years (braces, cars, sports, school, etc.)? If so, build a special category in your budget to save for that.
- Take a look at the technology you rely on: Are there things you use regularly that might need to be repaired replaced in the next year or two (car, phone, washer/dryer, etc.)? If so, build a special category in your budget to save for that.
If you take a close look at your past spending (it helps to go through old bank and credit card statements), you’ll probably notice items that seemed unexpected at the time, but actually come up regularly (patterns). And if you take a look at your lifestyle and your needs, you’ll probably be able to imagine things you’ll have to do to maintain that in the next few years (predictability). This deep dive into your spending and future needs will empower you to prepare without having to keep relying on your emergency fund.
For When You Have to Use that Emergency Fund
All of this cautioning away from using an emergency fund isn’t to say you can never use it – it’s just to say you shouldn’t subject your emergency fund to irregular expenses that could have been foreseen. That way, when you really do have an emergency, you’ll have a fund ready and waiting for it.
If you’re blindsided with a job loss or a health problem or a major expense that couldn’t have been predicted, then use that emergency fund so you don’t have to rely on debt (like credit cards) to recover from the emergency. Just remember, when you get back on your feet, you’ll need to make a plan to refill your emergency fund.
Emergencies can happen anytime and are more than likely going to happen many times throughout life. That means your emergency fund can’t be a one and done kind of deal – if you use it, you must refill it in case you need to use it again in the future. That may mean putting a temporary halt on other financial goals or rearranging your budget to make room to save, but once you get back to a comfortable amount, then you can resume your regularly scheduled budget.
Build an emergency fund, protect it by planning for irregular expenses separately, and refill your fund anytime you use it. This plan of action will empower you to be swift and agile with your finances. Isn’t that exactly the way you’d want to be in case of an emergency?
Image Credit: Woodrow Walden