Emergency funds don't work

While emergency funds are great in concept, putting them into practice can be difficult. They didn’t make sense to me until I adapted my approach to naming and saving for them. Although I understood the purpose of the emergency fund, I frequently dipped into it for things that weren't emergencies. Maybe you've had that experience as well.

What is an emergency fund?

First things first. What is an emergency fund? It seems obvious – it's a fund for emergencies. But what exactly qualifies as an emergency situation? The difficult thing is that emergencies differ. What constitutes an emergency for you might not be one for me. My family is close by. I own both a house and a car. I don’t have children or pets. 

Expect the unexpected.

More to the point, an emergency fund is for the unexpected or unwanted situations. A visit to an emergency room. A tree falling on your roof. The emergency fund is for the worst-case scenarios and the events we don’t want to happen but could. 

Why create an emergency fund?

We save for peace of mind and increased financial security. Depending on the source, anywhere from 24-42% of U.S. adults don’t have an emergency fund. Bankrate reports that 41% of U.S. adults could pay for an unexpected expense from savings. 

Why is saving for emergency funds so hard?

I had an emergency fund for most of my life. But only technically, because about 90% I didn’t use that money for emergencies. I would use the money to pay my credit card. Or I would really want something and tell myself, “It’s okay, I’ll save more later and get this now.” It was a cycle for years.

What changed? I stopped calling this kind of savings an emergency fund. It wasn’t specific enough for me. An “emergency” was too abstract. Yes, some unexpected event could happen at any time, but that was the problem. I was too abstract.You could also call it avoidance, but I needed more clarification to keep me from tipping into this fund. And it helped me stop using excuses and practice saving.

Your New Emergency Fund

Here are your new emergency fund categories and what you should consider when deciding how much to save in each category.

Car Repairs

What is the age of your vehicle and determine how much you need to save. I found this article helpful in exploring averages of car repairs. 

Dental + Medical Emergencies

Do you have children or other dependents? You’ll need more if you have more money for people you are financially responsible for.

Emergency Travel

Do you have family or anyone you will go to if they care or assistance? Do they live far away? Kid in college? Parents live several hours away?

Home Repairs + Emergencies

If you own your home, this is a must. And you’ll need a good amount in this category. Read this article to get an idea how much you should save if you own a home. Even if you don’t own your home, you’ll want some in this category. 

Income Reserve

This category is a different type of emergency. Here you’ll save for the essentials in case you lose your job. This category will cover rent or mortgage, food, transportation and other essential needs. You’ll also want money here if you are on a variable income. Other things to consider: Do you have family or friends who will support you in a hard time? Do you have another job or income source? For instance, I have a part time job for which I receive a steady income. I have family support as needed. But my coaching practice is a variable income stream.

The Unexpected

Because no matter what, life happens. We can’t account for everything, so this is a catch-all category for anything else. It was also the first category I funded, and I recommend you do the same.

Other categories would be for pets or other properties or vehicles you own. Also, do you live in an area prone to natural disasters? Consider having an evacuation fund that will cover food, shelter and transportation costs. Technically, any of us can experience a natural disaster, but if you’ve been evacuated before, chances are that it could happen again. Set up a fund for it just in case.

What are not emergencies?

Let's clarify what doesn't constitute an emergency. If it’s a possibility and expected even years away, it’s not an emergency. For example, it is not an emergency to maintain your vehicle. If you own a car, you need to maintain it. Same with new tires. If you keep the car for a while, you'll need new tires. 

Same goes for new appliances. If you own a home, you’ll need new appliances at one point. They are not an emergency unless you have a relatively new one and it stops working or leaks. 

Emergency Funds are NOT enough.

Being prepared for the unexpected doesn’t end there. Add two more budget categories to end the cycle of using your emergency fund. A miscellaneous category in my budget and a buffer in my savings account.

Your first line of defense to stop reaching for money in your emergency fund is a miscellaneous category. In my budget, I have a miscellaneous category in my checking account where I usually keep about $50.

Second line of defense is to create a buffer. I use my bank’s savings account as my buffer. I try to keep anywhere from $250 to $500 there. (Check your bank for any minimum requirements for your accounts.)

I keep my emergency funds aka rainy day funds in a high yield savings account. 

Building safety nets doesn’t mean worrying about everything that could go wrong. But we do want to be prepared if something does. It’s being proactive instead of reactive.

Whatever name you choose, let it suit you. I prefer Rainy Day Funds. Even though I enjoy actual rainy days, I still attribute them to what I do instead of a sunny day. If it rains when I was expecting to go outside, what do I do? If the term “emergency fund" works for you, use it. Don't overthink it. You can always change it.

Most of us are not going to save all of these categories all together and certainly not at the same time. As you are saving for your home repair category, but you need to travel to visit a family member in need, then use that money. The point of the categories is to prevent taking money for non-emergencies. But if it’s an emergency, use whatever you need from that fund.

If you don’t have an emergency fund, start one. If you’re really strapped for cash, put a $1 aside each month or each week. We’re not looking to get a big number right now but to build the habit. Savings is a habit. Don’t worry what others do or say. Start where you can.

I’m still working on my savings. And I’m sure I will be for a while. Most of us will be savings for a long time and that’s okay. Do what you can to save for the unexpected but live your life. You decide on your priorities. But always expect the unexpected.