2020 taught us many lessons, but I think the biggest one for me was financially related. Not only did I learn that I have much more discipline than I give myself credit for (shout out for the short term savings that put us into a home), but also that we must be agile with our finances. Now, I didn’t look up the statistics but last time I checked, over 75% of Americans don’t have a sufficient savings fund. And honestly, I don’t blame you. Most of the year I don’t have my funds together either.
But I’ve adopted the mindset to make consistent progress and be realistic about where I am is financial agility. I may not be in a place where I have a year’s worth of income saved or invested, but I can make decisions that will help me navigate hard times. Financial agility is a mindset that encourages me to put aside what I can towards the most threatening scenarios.
Creating situation-based goals
The key areas you should be building your emergency fund for are home emergencies, car repairs and maintenance, medical costs, debt payments, and living expenses. But if you want a quick and dirty method for saving, stick around to the end to hear my bonus tip.
Funny enough, the thing that sparked this topic was what I call the Great Blackout last month. Actually, it was a big Texas Winter Storm, but the snow and cold didn’t bother us–it was the lack of power during subzero temps that were new to me.
I won’t go into the details but we’re grateful that our situation wasn’t worse. We didn’t have any repairs or plumbing issues after the storm and rolling outages. However, it again put into perspective what’s at stake when you don’t have enough money saved for an emergency.
In order to feel financially agile, I decided that my emergency fund would be built off predictable one-time expenses related to our home, car, or even job. Yes, these are also emergency situations but the expected amounts can be logically determined, aka predicted.
The mere $1,000 is an arbitrary number that we hear a lot for emergency funds but something formulated off your experience will be much more productive. Striving to reach the $1,000 mark to begin is cool, but I’ve found more luck with making my savings goal based or task oriented.
Before I get into the list, I want to remind you that I’m no certified financial coach, advisor, or specialist but I love budgeting and optimizing personal systems. I’ll be sure to share my logic behind each category so you can adapt it for yourself. Also, my husband and I choose to manage our funds with a hybrid model. We share select expenses and some of our income, but a lot of our pre-marriage bills are still separate. So that’s what I’ll be referring to in today’s podcast.
Emergency Fund 1: Home Repairs
First, home repair or renters insurance deductibles. Obviously this one is front of mind because we just went through a crazy week where a lot of people had to put in claims for water damage and plumbing issues in their homes.
I will start with the home. Home insurance is different from other insurances because you typically don’t have to pay a deductible for work that has to be done. After an adjuster reviews the damage and you’re approved for a vendor, no money has to pass through you. Now, if there are related expenses that are not covered, then you’re on the hook. This is the amount that I would determine and then start a savings goal based on that.
Similarly with renters, you have to go through the claims process. However, this one is more like car insurance where you have to pay a deductible for the service. I’d suggest whatever your deductible amount is, it should be your minimum savings goal. You don’t have to have all that money up front, but that should be the minimum goal.
I think this emergency fund goal goes without much explanation. Freak accidents can happen at your home at any time. Having the money on hand to restore your home back to normal status as quickly as possible is a big help to your future self. Any time you can avoid using credit in an emergency situation is a big plus!
Emergency Fund 2: Car Repairs
Next up is the car repair deductible. It’s a harsh reality that most of us will be in at least one car accident in our driving lifetime. I hope that you will not have any major medical consequences, but the vehicle may require some type of repair. With the appropriate coverage, you should only have to worry about your deductible as far as finances go. And if you were not at fault, the other driver’s insurance SHOULD cover your costs. It’s just a major inconvenience for a short period.
I suggest, and personally strive, to keep an emergency fund for my car with the minimum savings goal equal to my deductible. The car insurance deductible is typically a low number I can reach quickly. It’s not uncommon to have a lot more saved than what I need. If I have the flexibility in my budget, I’ll continue to add to it even once I surpass my goal. This can easily be the start of a new car down payment or funds for regular car maintenance. I’ve taken advantage of this with my previous car that always had some extra expense every time I got an oil change.
On the other hand, if I have a huge expense in another area and this particular fund is above what I need, I don’t feel guilty about pulling from it. Following these guiding money principles help me to feel in control of my money because I can justify my spending decisions more easily.
Emergency Fund 3: Medical Expenses
The third sub-emergency fund I set up is for medical expenses. Since I have asthma and I most recently learned some spinal misalignment (shout out to Mcdonald Chiropractic) I have to keep a decent amount of money set aside for medical expenses.
This particular fund was a bit trickier for me to come up with a rule of thumb, because there isn’t a clear cut expense like a one time deductible that would be sufficient. So for you, your logic behind the amount will differ based on your health status and type of insurance you have.
I ultimately decided on saving 25% of my annual medical insurance deductible. I also could’ve tried to base it off my out-of-pocket maximum but that number is much higher and looking at my medical costs so far, not much of my spending goes towards that. In the end, I was happy with this amount because the number is on par with the other funds, and I believe that an emergency medical event will add up to that number or less. If it’s higher, that won’t be the end of the world. I would most likely set up a payment plan with the healthcare provider.
Pro tip! If you ever end up in a sticky medical bill situation, work with the hospital, clinic, or office to make a payment arrangement. You don’t want that bill going to collections and complicating your finances. Open communication from the beginning is key. And if you’re not in the financial position to cover it, most healthcare organizations have a payment assistance fund since they are set up as non-profit organizations!
Emergency Fund 4: Debt Payments
This next one is my favorite because I’ve had to do my most financial work in this area, and that’s a debt emergency fund. You never know when you may end up in a jobless situation. Not only may you be left with everyday expenses, but also debt ranging from credit cards, to a car note, and student loans. I originally only had this section to include credit card debt until I remembered that monthly debt payments are made up of many different things.
So again, my logic behind this one is to have enough money set aside equivalent to one month of minimum payments. For some reason, I felt confident in adding on 25% though. So I decided to make this fund 125% of my typical monthly debt payments. My logic with the 25% is a buffer for any income-less time beyond the first month where a few payments may be due but not all of them before finding another source of income.
I also want to point out that you can treat these like medical bills if you end up without income. Student loans can be put on pause when you are income-less, and other creditors have payment plans and forbearance options for those who land on hard times. Just be very upfront with communication and do what you can to make your payments.
Emergency Fund 5: Monthly Expenses
The last fund I have identified is the monthly living expenses or monthly income. Obviously, this fund is similar to the debt fund as it will help bridge the gap for a month if you lose your job, or have a huge unexpected bill that totals more than your entire savings balance.
I base this on my necessary monthly expenses, so that pretty much includes utilities and groceries. Not too many items from my budget make it to this short list. Subscriptions, dining out, extra savings, and the like do not count. This fund is for bare necessities only. Having this fallback fund boosts my confidence and financial agility because all of my bases are covered in case of an emergency.
I also thought this was a great starting place because my goal with financial agility is to be intentional with savings, but also realistic. You may also see a lot of budgeting advice to save 3-6 months, or even a year, of living expenses but this number can be very hard to reach. Granted, I might be making up for some of it in all the other funds, but starting with 1 month is more realistic for me. I rather have a small, actionable goal that motivates me to continue saving, even if it is nowhere near 6 months worth of expenses. I kind of trick myself into this thinking, because by the end of the year, I will have a decent stash that actually equals a huge percentage of the 3-6 month savings.
Following the Logic
Now, I intentionally chose the 1 month mark for my funds from personal experience. When Nick and I moved to Texas from Wisconsin, I was jobless. I had to job hunt in order to cover all of my bills. Fortunately, I found my first Texas job within 3 weeks of moving and I’ve always been blessed to land jobs fairly quickly. Assuming that my growing skillset and faith in God continues to carry me through, I’d expect to find a solution to my financial concerns within a month of losing my income. So these emergency funds can fill the gap in the meantime. You’ll want to determine your time period from a similar logic based on your experience.
Also keep in mind that these funds build over time. I don’t expect to max out all these funds immediately. The amounts I listed are goals to work towards. Whenever I get paid, I divvy up a manageable amount into the various funds until I reach my goal. After that is accomplished, I’ll save towards something else or compound.
Bonus Emergency Fund Strategy
Now, here’s a bonus method for your emergency fund and it’s independent of the other funds I previously talked about. This one calls for simply saving 10% of your gross income. So if you’re paid biweekly, it would be 10% of your bi-weekly paycheck. I already regularly give 10% of my gross income each paycheck to my church as a tithe offering. When I saw my total tithes for 2020, I was amazed. I never lapsed in my giving and when we received extra money, I would give an offering from that as well. I instantly thought to myself, if I could maintain that type of saving for my future self, I’d be very happy with the balance at the end of each year.
So currently I do save that amount as my base general savings, but that savings is the first to be spent if something comes up.
If you don’t want to go through all the fuss of setting up the funds that I mentioned earlier, this may be a good fit for you. Simply contribute 10% of your income each month to your emergency fund and pull from it as needed. The minimum savings goal here would be the full year’s worth of 10% of your income. I really like this option too and if I’m feeling lazy, I’ll slip into this savings pattern to keep things simple.
Now saving like this can be a sacrifice if you’re not already used to saving 10% of your income, but once it becomes a staple of your budget, you will find more financial agility and confidence in your budget to tackle new obstacles.
Before I end this, I’ll tell you how I even organize all my funds in my savings because they are so specific. I leverage Virtual Wallet through PNC Bank. My account is split up into 3: Spend, Reserve, and Growth. Within the Reserve and Growth accounts, I can create savings goals. From the outside these all look like one big pot of money. In reality, I have sub accounts with set savings goals and the ultimate ability to add money to it. And that’s how I keep up with it!
I’m sure if you don’t have a feature like this in your account, you can at least use an app like Qapital to keep your money organized like sub-accounts. There are also high yield savings accounts online that allow you to setup a bunch of sub-accounts or goals to better achieve this as well.
There you have it. So to recap, the key areas you should be building your emergency fund for are home emergencies, car repairs and maintenance, medical costs, debt payments, and living expenses. But if you want the quick and dirty method, just save 10% of your income for emergencies and dip into that fund as needed.
Not ready for the emergency fund with your budget yet? Start here with your finances!