What is an Emergency Fund Really For?


budget / Tuesday, September 25th, 2018

We have all heard the phrase “save for a rainy day” but what does that really mean? How can we really be sure that we are planning appropriately for a rainy day and how can we appropriately define what “rainy day” really means for each of us?

Well for starters, let’s define a “rainy day” or emergency which we would need a savings account for. An emergency could be something like literal rain if your roof starts leaking and you need several hundred to thousands of dollars to repair it. It could be a smaller, unexpected expense like an extra $200 to pay for a vet bill because your dog got sick.

It really depends on your personal situation. If, for example, you have an extra $200 in your monthly budget you may not consider that vet visit an emergency expense. But if you have a really tight budget and an extra $200 cost would mean that some other bill doesn’t get paid, then yes, it is an emergency.

As Dave Ramsey says, “an emergency fund is your financial safety net for when things go haywire.”

So with that being said, an emergency is whatever is an extra, unexpected expense that has to be paid now and cannot be covered out of your monthly budget. The amount really doesn’t matter but you have to define for yourself whether an expense meets the “emergency” criteria. If it is something you can save up to pay for, it is not an immediate need and is not an emergency.

What about those extra expenses that may not be emergencies but that are not regularly occurring, monthly expenses? Things like new tires and regular maintenance for your car, annual daycare administration fees, holiday gifts, vacations (including obligatory trips to visit family that may not feel like a vacation), your friend’s bachelor party, etc are not emergencies. They may be things that seem to sneak up on you and you find yourself in an “oh crap” moment and want to break that piggy bank, but they are not true, unexpected emergencies.

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The best way to keep some funds in an emergency fund is to 1) add money in automatically every month or from every paycheck and 2) don’t touch it unless it’s a true emergency. I recommend setting up automatic transfers from your paycheck so that you don’t even see the money hit your regular checking account. It doesn’t matter what the amount is, just make sure it is something you can afford and add it as a line item in your monthly budget. If you need that money every month and find yourself transferring it back from savings into checking, then you don’t have a savings problem, you have a budgeting problem.

Now, how to determine if something is a true emergency? As I said above, if you can save up for it or if it happens at regular intervals and/or you know in advance it is coming, then it is not an emergency. There are some things that walk the line between emergency and non-emergency. For example, if your tire blows and you need a new one pronto, that is an emergency because you can’t drive on three wheels. But, you also know that tires wear out and will need to be replaced in time. The most financially prudent thing to have done would be to have started a sinking fund for your new tires and hopefully you would have already had the money set aside in non-emergency savings that could have paid for the new tire.

A sinking fund is savings you set aside for a specific, upcoming cost. That might be the $100 you save every month to have $1200 by December to use on Christmas present shopping. But more importantly, it might be the $100 you save every month for house maintenance, the $30 you save every month for car maintenance, and the $10 you save every month for the annual daycare administration fee. Sure, maybe you don’t need to set aside a sinking fund of $10 a month if you can cover a $120 extra expense in your monthly budget, but many people don’t have that luxury. This is where planning ahead is the real budgeting MVP.

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Planning ahead is the key to your emergency fund and your budget, as well as a keen sense of self. Ask yourself honestly whether the need you feel is truly a need and an emergency or rather just a want. Determining the difference between wants and needs can be really hard, honestly, but this is the really personal part of personal finance that makes us grow into finally and emotionally wiser people.

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