Preface: Part 4 - Savings & Emergency Funds

 

 

 

Emergency Fund

There are a number of situations that arise in life that you simply do not have control over. For this reason, it is essential to have emergency savings (also known as a rainy day fund) to cover the necessary expenses for these situations. Plus, having money set aside for these emergencies gives you the peace of mind knowing that you have a little financial cushioning to ride it out.

From most articles and books that I have read, I believe the general rule of thumb is anywhere between 3-8 months of living expenses.  I believe Dave Ramsey says you need at least 3-6 months of living expenses, while Suze Orman say that you need 8 months.

It's interesting to see such a large disparity among the financial experts. I believe its because each family have different circumstances and thus their own opinion on what their emergency savings  should be.  For our family, we've estimated that we would need approx. $4,600/month to cover our basic needs (food, lights, water shelter, etc. but does not include luxury items such as cable, dining out, entertainment, etc.). For us, a 6-month emergency fund would need to be at least $27,600 and an 8-month emergency fund would need to be $36,800.

Since the current job market is a bit challenging, and we are solely dependent on my income at the moment, our family decided that we needed a little bit more set aside to feel secure. So at the moment, we have about $64,000, which would cover approximately 13.8 months of living expenses.  We realize it is more than the recommended 6-9 months, but given our circumstances and our risk meter, it is what our family needs to have peace of mind.

However, as the job market improves and/or my wife goes back to work, we are planning to use the excess money from our emergency fund to invest and build up our passive income stream with dividend paying stocks and peer-to-peer lending notes. In fact, our family eventually plan to use our Peer-to-Peer lending accounts (Prosper & Lending Club) as our emergency fund when we've hit the cross-over point where payments each month from our invested notes  is sufficient to cover our basic living expenses. At the moment, we receive approx. $700/month from our peer-to-peer lending accounts so unfortunately, we are several years away from achieving this goal.  

Lesson Learned: Having money set aside truly does give you peace of mind.

 

Sinking Funds

When my wife and I sat down and decided that we would keep her home a few years so she could be with our children for their first few years, we not only agreed that would have a 12-month emergency fund, but also agreed to provide additional savings in various sinking funds. We currently have:

• A Home Repair and Maintenance Fund;
• A BIG Ticket Items Fund;
• A Next Vehicle Fund;
• A Property Taxes Fund;
• A Christmas Gifts Fund; and
• A Vacation Fund. 

Although these items do not come up every month, they are items that can definitely impact a family's budget if you don't plan for them in advance.  By setting the money aside before you use it, you will avoid using your emergency fund unnecessarily, as well as give yourself more negotiating power when it is time to purchase a designated item.

 

For both our emergency fund and our various sinking funds, we maintain several online savings accounts at Capital One 360.  I know it may not be the highest yielding online account, but it is one that we've had for years. In fact it ING Direct when we first opened our accounts.

Lesson Learned: Sinking funds are great to have but make sure that you know the amount you want to save and a timeline to meet your goal. Otherwise, you may end up saving too little or too much money.

Slush Funds
Both my wife and I each have slush fund accounts. We essentially use the money from these accounts as fun money. We spend money in these independent accounts at our own discretion, without the need for input or approval from the other spouse. Typically, our slush fund money is spent on hobbies, girls and guys night out, etc.  But we both also buy each other gifts for anniversaries, birthdays, valentines day, mother and fathers day. I will admit that receiving gifts (big or small) becomes more meaningful when we know the other sacrificed a part of their fun money for the gift.

To fund these accounts, we transfer $40 each month from our family's main checking account into each slush fund account. Secondly, we both also sell things online (via Ebay, Craigslist, Instagram, etc.) so the monies we individual make go directly into our respective slush funds. Third, if we get any cash or gift cards as presents and we agree to add to family pot, the value of those presents are credited to our slush fund accounts. And lastly, we have decided that if we ever received a windfall (i.e. inheritance, income tax refund, Vegas winnings, etc.), that 10% (5% each) would go towards our slush fund accounts. 

Our slush fund accounts are maintained through a Paypal account.  We chose Paypal because it is so widely accepted both online and at brick and mortar stores.  It is easy to wire money back and forth from our family checking account. And best of all, we get cash back every time we use our Paypal debit card.  It is not a whole lot, but it is certainly better than getting nothing back at all! 

Lesson Learned: Everyone needs fun money...Plus, gifts are more special when it not bought using family money.