This week we’ve had both good and bad news. After our car accident, it’s quite possible that we may have to dip into our emergency fund. While I’m not happy to be using it, I’m very glad that it’s there for us.
All of this got me to thinking about the slight difference (in my mind at least) between a regular savings account and an emergency fund. When do you use your emergency fund, and when should you have a specific savings fund? I’ll share my thoughts below based on recent events. Hopefully you’ll have some advice as well on how to use your emergency fund without going broke.
Total loss on the car
This car accident is proving to be more and more of a headache, as USAA declared our beloved Acura Integra. That means USAA will pay us a fair amount for our car and will then junk it because the repairs cost more than the car is worth. While I’m happy that we’re getting a check to put toward a new car, we now have to deal with the hassle of buying a car.
Between the check we’re supposed to get and the money have stashed away in our car replacement fund, we’re hoping to find something reliable. If not, we’re prepared to dip into our emergency fund.
Avoiding car payments
We’re going to do our best to pay cash for our next car. As you saw with my tips on buying a car, that means we have to go through the process of finding the right one for us.
- Determine our budget. Right now we’re looking at the money from USAA and the money saved in our car replacement fund. If necessary, we’ll take up to an additional $1, 000 from our emergency fund.
- Decide on our must haves. Reliability and gas mileage are the two big factors. My husband would prefer a two-door coupe with manual transmission, but he’s keeping his eyes open for a good deal.
- Decide on new or used vehicle. With our budget, it’s a given that this will be a used car. As long as everything checks out mechanically, having a used car is not an issue.
I’m digging through Edmunds and Consumer Reports to get ideas on what we need to avoid and which car may give us the best bang for our buck.
We’re happy that we paid off our car loan and we don’t intend to have car payments again. They’re just such a big monthly expense that we’d like to avoid having a car loan if at all possible.
Emergency fund or savings?
Buying another car was part of our financial plan – eventually. We knew that one of cars would eventually going to break down, and that it would be smarter to get a reliable replacement.
The emergency for us now is having to buy that replacement car much sooner than we planned. As you can see, all of our well thought out plans we had went out the door when this came up. So while we don’t have nearly enough to buy a car in our ING subaccount, we’re happy to have something set aside.
Ultimately, my recommendation is to build up your emergency fund before you start saving for specific goals. If an unforeseen expense, such as a car accident, leaky roof, etc. crops up before you have enough saved in a dedicated account, then you’ll have to dip into that emergency fund. If not, then spend from other sources of money and keep that emergency fund in tact.
So just how much should you have stashed away in your emergency fund? Most experts generally recommend 3-6 months expenses, but I think a better rule of thumb is enough to allow you to sleep well at night. The fewer responsibilities you have, the less you’re likely to need. In other words, a couple with kids probably needs much more than a college student.
Once you have a fully funded emergency fund, start redirecting those deposits into a car replacement fund, an account for a house down payment, etc. You’ll be amazed at how quickly those focused deposits accumulate, and hopefully you’ll have a decent cushion when the unexpected happens to you.
Have you ever had to dip into your emergency fund?
Laura, since you are a USAA member, you can use their AutoCircle (www.autocircle.com) program to find and purchase your new car. Non-members can use it for the research part, as well. I had the opportunity to do a preview run of the program (http://paycheck-chronicles.military.com/2010/08/04/usaas-new-auto-circle-launches-today/) and I am sure that I will use it next time I buy a car, new or used.
I’m glad that you weren’t hurt!
One of my brothers was in a bad cycling accident and got a severe brain injury, while I was living overseas. I was able to quit my job, catch the next flight home, and move back home to support my parents.
I don’t recall having an emergency that I could not cover with my own funds. I pay my CCs in full each month and the highest I’ve charged on a personal CC is $2,000. I use the CC for cashback rebates, then pay in full before the due date.
I don’t make a distinction between savings and EF. To me, they are the same. I keep my savings in a Rewards Checking Account that earns 4.01% up to $25k and 1.00% beyond $25k. I link my Rewards Checking Account to two brokerage firms. When the amount gets over $25k, I buy mutual funds and hold them long term.
I don’t have an emergency fund because I don’t need it. If I did lose my job then I would just open up a credit card account and use that until I find a new job.
The “when to use an emergency fund” is a very tough question. There are things that are definitely “not” emergency fund things to me (like Christmas presents – you know Christmas is coming every year – it’s not an emergency). But there are things that are – @Olivia’s situation for example is not predictable and definitely an emergency (and heartbreaking – so here’s to saying a prayer for you and your family).
But if you know you’re going to need a new car soon (i.e. in the next year or so) I would say to budget a small amount for that in savings with a target date for when you’ll have enough to buy the car you need (and then sell your beater even if for parts – or donate it).
In that instance a car accident would still be an emergency because it was not predictable – but only to the extent it made the car need happen sooner and you weren’t able to save up enough in time. So the difference between the check and the car you would buy anyhow would be an emergency and only that difference should be borrowed from the emergency fund. Then you pay yourself back as fast as you can!
I have the same view on home repairs and appliances. For example, if you know it’s only a matter of time when your dishwasher breaks and is not repairable, put a few bucks a month into savings for it. When you save up enough for it try and an sell your used one (for parts, to a repairperson, etc.) and buy the new one – you’ve saved up. But if a few months into the savings something happens that breaks it, it’s ok to dip in and then pay yourself back fast – REALLY FAST! (or – GASP – you could just wash dishes by hand until you save up…). I probably would dip in for that one though.
My two cents.
Often. As soon as we seem to be getting our heads above water, something happens. A premie, then in a year and a half, eye surgery for said premie, then an incomplete miscarriage (and a medical procedure), then another premie. Now it’s more medical stuff, not covered by insurance, not even going towards a deductable. Plus cars that died unexpectedly in between. We’re sort of developing a “Job” complex. Well, as someone else mentioned, we’re glad at least we won’t be going into debt…..
We’ve had to a few times and chose too a few times. When we had to it was for house repairs to replace the crumbling chimney and roof-caps at the tune of ~$1,300. We elected to dip into it to pay off our HELOC last year. Not having the HELOC is nice…now if I can just get rid of the pesky student loans.
I totally hear you. I was in an accident 1 week ago today and yesterday got the quote for my car, lets just say it’s more than the worth as well. However, I did find some really great places to look for new/used cars. My budget is definitely tight because of my student loan debt, but luckily for me, I’ve been saving to replace my car just as you have, but unfortunately not for very long. But anyway, it’ll be on my blog soon enough as well. But here are some good places to take a look for cars: autotempest.com (big search engine like kayak but for cars), edmunds.com for lots of free research info and searches, and then also don’t forget about car rental places (enterprise, budget, etc), they are always selling their cars and usually well maintained. Anyway, I wish us BOTH good luck. Email me if you want any more info, I’m bad about checking up on following comments.
Yep, I had to a couple of times in the last couple of years.
The furnace at my late mother’s house went out – while the house was in probate. I’ll get that money back from the estate, just like any other creditor, but it sure was nice to know that the pipes wouldn’t freeze.
The other time was a blown transmission on my son’s car. He had a small ‘car fund’ – but only enough for tires and not for a major repair. He’s paid me back over about six months and the money went back into the efund.
Notice neither of these were MY emergency, but it’s a good thing to be able to help out family members. I couldn’t have done that without the efund.
Glad to hear you have the emergency fund set up, that’s why we save for it, just in case we need the money we don’t panic.