Our 'cure' for emergency expenses

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willthrill81
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Our 'cure' for emergency expenses

Post by willthrill81 » Fri Jan 12, 2018 5:06 pm

About six years ago, my wife and I read Mary Hunt's book "Debt-Proof Your Marriage," which was a good read. What was the most valuable piece of information we got from her was the idea of a 'freedom fund', an account used to save and pay for irregular expenses. Why we hadn't thought of this before, I don't know, but it made sense to us both. The basic idea is that you take your anticipated irregular expenses and then save for them on a regular basis so that you have the funds available to pay for them when they arise. A simple example would be vehicle tags. These are usually paid annually, so you just take the annual expense (e.g. $180), divide it by your savings periods (e.g. 12 months), and then save that amount ($15 per month). You then do this for all of your irregular expense categories, refining your estimated expenses as go.

This has worked fantastically for us. We now keep our 'freedom fund' as a savings account with Ally, and I track all of the categories for expenses in an Excel spreadsheet. I make note of our monthly credits and debits each category as well as our remaining balance in each category. Most months, we have a net 'in-flow' to the account, but sometimes we have a net 'out-flow'. After having done this for years, we now have very good estimates for what we need in each category, but we are constantly tweaking it as needed.

Some of our irregular expense categories are vehicle maintenance/taxes, home maintenance, HOA dues, clothing, gifts, 'allowances' for myself and my wife, and travel. On occasion, we have found that we need to spend more than what we have saved in a particular category. This has not been a problem as one category may be in the red, but there is enough 'black' in the others to cover the temporary short-fall. When this has happened, we usually find that we just need to increase our savings for the short category going forward and are back in black across the board in short order. If it's a discretionary expense, such as clothing, we nearly always refuse to spend what we don't have already saved in that category.

Since we've done this, I can honestly say that we have not had one month where we encountered an emergency expense that we didn't have the funds to immediately cover. We've had unexpected expenses come up, like when I made a stupid mistake and blew out both tires on one side of our car last year, but we've always had enough to cover them. Those things that used to be 'emergencies expenses' have just vanished. Plus, we have adequate insurance in all of the key areas and enough to cover deductibles. A job loss would be unfortunate since we are a single-income family, but I always work under multi-year contracts and would be know about that well before it actually occurred; we've been very blessed in that regard.

Maybe our experiences will help someone else. YMMV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TravelforFun
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Re: Our 'cure' for emergency expenses

Post by TravelforFun » Fri Jan 12, 2018 5:28 pm

willthrill81 wrote:
Fri Jan 12, 2018 5:06 pm
About six years ago, my wife and I read Mary Hunt's book "Debt-Proof Your Marriage," which was a good read. What was the most valuable piece of information we got from her was the idea of a 'freedom fund', an account used to save and pay for irregular expenses. Why we hadn't thought of this before, I don't know, but it made sense to us both. The basic idea is that you take your anticipated irregular expenses and then save for them on a regular basis so that you have the funds available to pay for them when they arise. A simple example would be vehicle tags. These are usually paid annually, so you just take the annual expense (e.g. $180), divide it by your savings periods (e.g. 12 months), and then save that amount ($15 per month). You then do this for all of your irregular expense categories, refining your estimated expenses as go.

This has worked fantastically for us. We now keep our 'freedom fund' as a savings account with Ally, and I track all of the categories for expenses in an Excel spreadsheet. I make note of our monthly credits and debits each category as well as our remaining balance in each category. Most months, we have a net 'in-flow' to the account, but sometimes we have a net 'out-flow'. After having done this for years, we now have very good estimates for what we need in each category, but we are constantly tweaking it as needed.

Some of our irregular expense categories are vehicle maintenance/taxes, home maintenance, HOA dues, clothing, gifts, 'allowances' for myself and my wife, and travel. On occasion, we have found that we need to spend more than what we have saved in a particular category. This has not been a problem as one category may be in the red, but there is enough 'black' in the others to cover the temporary short-fall. When this has happened, we usually find that we just need to increase our savings for the short category going forward and are back in black across the board in short order. If it's a discretionary expense, such as clothing, we nearly always refuse to spend what we don't have already saved in that category.

Since we've done this, I can honestly say that we have not had one month where we encountered an emergency expense that we didn't have the funds to immediately cover. We've had unexpected expenses come up, like when I made a stupid mistake and blew out both tires on one side of our car last year, but we've always had enough to cover them. Those things that used to be 'emergencies expenses' have just vanished. Plus, we have adequate insurance in all of the key areas and enough to cover deductibles. A job loss would be unfortunate since we are a single-income family, but I always work under multi-year contracts and would be know about that well before it actually occurred; we've been very blessed in that regard.

Maybe our experiences will help someone else. YMMV.
I do my budget monthly and my actual expenses track pretty closely. I don't keep an emergency fund.

TravelforFun

NYC_Guy
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Re: Our 'cure' for emergency expenses

Post by NYC_Guy » Fri Jan 12, 2018 5:39 pm

TravelforFun wrote:
Fri Jan 12, 2018 5:28 pm
I do my budget monthly and my actual expenses track pretty closely. I don't keep an emergency fund.

TravelforFun
Just curious, how do you fund actual big surprises? Such as replacing HVAC equipment (>$5000) or removing a large dead tree (>$3000). I can see how renters can avoid saving for major cap ex, but if you own a home, things break and those things can be expensive. I'm also curious what you would do if you experienced a substantial loss of income...liquidate (longer term) investments?

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Re: Our 'cure' for emergency expenses

Post by The Wizard » Fri Jan 12, 2018 5:41 pm

I don't see any emergency expenses in the OP's list.
A true Emergency Fund is for loss of job or large medical bills.
Most other irregular expenses should not be categorized as emergencies.

I simply keep extra funds in my checking account to cover expenses, expected or unexpected. I keep $5000 to $10,000 available this way and most recently, this allowed me to pay a couple property tax payments for 2018 in advance, prior to 2017's end.

I suppose I could fool around shuffling funds into and out of a savings account as well, but I like the simplicity of just having funds in checking...
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Re: Our 'cure' for emergency expenses

Post by sailaway » Fri Jan 12, 2018 5:45 pm

So, you have created an actual budget that takes into account predictable expenses, like HOA fees and home maintenance, and you find this works? This just means that you have been fine tuning your budget.

That does not address the emergency fund, to be drawn on in case of a major medical expense or job loss.

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willthrill81
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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Fri Jan 12, 2018 5:46 pm

NYC_Guy wrote:
Fri Jan 12, 2018 5:39 pm
TravelforFun wrote:
Fri Jan 12, 2018 5:28 pm
I do my budget monthly and my actual expenses track pretty closely. I don't keep an emergency fund.

TravelforFun
Just curious, how do you fund actual big surprises? Such as replacing HVAC equipment (>$5000) or removing a large dead tree (>$3000). I can see how renters can avoid saving for major cap ex, but if you own a home, things break and those things can be expensive. I'm also curious what you would do if you experienced a substantial loss of income...liquidate (longer term) investments?
Replacing something like HVAC equipment is not usually an unexpected expense; you can usually see it coming and save for it appropriately. Specifically, replacing HVAC components is often all that's really necessary, and the expense for that is usually under $1k in my experience.

Home maintenance is one of the categories that we save for. When we had to get a new dishwasher a few months ago, we just paid for it from that category.

Loss of income is a different matter. For most, this is a real concern.

I'm not saying that an EF is unnecessary; we have one besides our irregular expense fund large enough to cover about three months of expenses. But we've found that emergencies that once seemed to happen with some regularity now don't.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

TravelforFun
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Re: Our 'cure' for emergency expenses

Post by TravelforFun » Fri Jan 12, 2018 5:48 pm

NYC_Guy wrote:
Fri Jan 12, 2018 5:39 pm
TravelforFun wrote:
Fri Jan 12, 2018 5:28 pm
I do my budget monthly and my actual expenses track pretty closely. I don't keep an emergency fund.

TravelforFun
Just curious, how do you fund actual big surprises? Such as replacing HVAC equipment (>$5000) or removing a large dead tree (>$3000). I can see how renters can avoid saving for major cap ex, but if you own a home, things break and those things can be expensive. I'm also curious what you would do if you experienced a substantial loss of income...liquidate (longer term) investments?
I put large unanticipated expenses on my credit card and pay off the balance when due by selling a little bit of my bond funds.

TravelforFun

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willthrill81
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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Fri Jan 12, 2018 5:49 pm

The Wizard wrote:
Fri Jan 12, 2018 5:41 pm
I don't see any emergency expenses in the OP's list.
A true Emergency Fund is for loss of job or large medical bills.
Most other irregular expenses should not be categorized as emergencies.
sailaway wrote:
Fri Jan 12, 2018 5:45 pm
That does not address the emergency fund, to be drawn on in case of a major medical expense or job loss.
We have an HSA that would easily cover medical bills; we max it out every year now. Job loss isn't a problem for me since I work under multi-year contracts. If I was to be let go, I would have over a year's notice of it.

I'm not saying that an irregular expense fund should replace an emergency fund; we have one that covers about three months' expenses. But I have noticed that the 'emergencies' we once experienced are no longer.
The Wizard wrote:
Fri Jan 12, 2018 5:41 pm
I simply keep extra funds in my checking account to cover expenses, expected or unexpected. I keep $5000 to $10,000 available this way and most recently, this allowed me to pay a couple property tax payments for 2018 in advance, prior to 2017's end.

I suppose I could fool around shuffling funds into and out of a savings account as well, but I like the simplicity of just having funds in checking...
Wherever you want to keep the funds is fine and probably more a matter of personal preference. I like earning some interest on the fund.
sailaway wrote:
Fri Jan 12, 2018 5:45 pm
So, you have created an actual budget that takes into account predictable expenses, like HOA fees and home maintenance, and you find this works? This just means that you have been fine tuning your budget.
Yes, it works.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

IowaFarmWife
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Re: Our 'cure' for emergency expenses

Post by IowaFarmWife » Fri Jan 12, 2018 6:03 pm

I found about the "freedom account" about 10 years ago, and I have been budgeting the same way too. My only regret is that I didn't start doing this earlier in my life. It really has saved a lot of budgeting headaches over the years. One thing I do in addition to what you describe is having a category for "Just in case," (JIC). (My DH calls it the "Oh sh__t account) :D I keep about a 1000 in that category in case I under budgeted a category, or something unanticipated crops up. I also have an emergency fund that would be our next layer of defense, including about 9K in our brick and mortar bank, and other funds in I bonds and online savings accounts. I don't use an excell sheet to track, but I use quicken and set up each budget category as if it was its own bank account. I just enter the deposits and expenses into each "account," and then make sure the balances with the bank statement. It is pretty easy.

thangngo
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Re: Our 'cure' for emergency expenses

Post by thangngo » Fri Jan 12, 2018 6:04 pm

willthrill81 wrote:
Fri Jan 12, 2018 5:06 pm
About six years ago, my wife and I read Mary Hunt's book "Debt-Proof Your Marriage," which was a good read. What was the most valuable piece of information we got from her was the idea of a 'freedom fund', an account used to save and pay for irregular expenses. Why we hadn't thought of this before, I don't know, but it made sense to us both. The basic idea is that you take your anticipated irregular expenses and then save for them on a regular basis so that you have the funds available to pay for them when they arise. A simple example would be vehicle tags. These are usually paid annually, so you just take the annual expense (e.g. $180), divide it by your savings periods (e.g. 12 months), and then save that amount ($15 per month). You then do this for all of your irregular expense categories, refining your estimated expenses as go.

This has worked fantastically for us. We now keep our 'freedom fund' as a savings account with Ally, and I track all of the categories for expenses in an Excel spreadsheet. I make note of our monthly credits and debits each category as well as our remaining balance in each category. Most months, we have a net 'in-flow' to the account, but sometimes we have a net 'out-flow'. After having done this for years, we now have very good estimates for what we need in each category, but we are constantly tweaking it as needed.

Some of our irregular expense categories are vehicle maintenance/taxes, home maintenance, HOA dues, clothing, gifts, 'allowances' for myself and my wife, and travel. On occasion, we have found that we need to spend more than what we have saved in a particular category. This has not been a problem as one category may be in the red, but there is enough 'black' in the others to cover the temporary short-fall. When this has happened, we usually find that we just need to increase our savings for the short category going forward and are back in black across the board in short order. If it's a discretionary expense, such as clothing, we nearly always refuse to spend what we don't have already saved in that category.

Since we've done this, I can honestly say that we have not had one month where we encountered an emergency expense that we didn't have the funds to immediately cover. We've had unexpected expenses come up, like when I made a stupid mistake and blew out both tires on one side of our car last year, but we've always had enough to cover them. Those things that used to be 'emergencies expenses' have just vanished. Plus, we have adequate insurance in all of the key areas and enough to cover deductibles. A job loss would be unfortunate since we are a single-income family, but I always work under multi-year contracts and would be know about that well before it actually occurred; we've been very blessed in that regard.

Maybe our experiences will help someone else. YMMV.
Interesting. Your items seem to be "irregular" more than "emergencies". But it's still a very good method for someone who starts out budgeting and plan for irregular expenses. When you keep your budgets for years and see the trends, it'll very easier to plan for those irregular items, i.e. home maintenance, property taxes, car repair, etc. In addition, one's cash in-flows may be enough to cover most of irregular items monthly, so the extra layer might not be needed.

One still needs to plan for the worst, i.e. lost of job, medical emergencies, etc. Think about 911 events and what if it happened to you. Maybe it's not that worse, but still a 3 to 6 month expenses EF is recommended for most people.

remomnyc
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Re: Our 'cure' for emergency expenses

Post by remomnyc » Fri Jan 12, 2018 6:08 pm

Our emergency expenses come from our emergency fund. Emergency expenses is a misnomer as it's everything lumpy that's not a typical expense, such as camp costs, new furniture/appliances, vacations, etc. When the emergency fund is down more than 10k, we replenish it using interest and dividends. No spreadsheets. No calculations. Easy-peasy.

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Re: Our 'cure' for emergency expenses

Post by trystero » Fri Jan 12, 2018 6:10 pm

Again YMMV, but wife and I do the same as OP, but in fact split these items into two accounts - Irregular Required and Irregular Optional.

Insurance (life, disability, home, vehicular), permits and the like are required. In other words, expenses that we must pay almost irregardless of income.

Irregular Optional takes in gifts, travel and the like. They're items for which we make beginning of year allocations for in our budget, but plans would change in case of emergency. If one us of loses our job, for instance, then we won't be going on vacation.

Agree that this is all budgeting, and occurrs irrespective of where the money is actually held (in our case savings accounts at Ally).

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willthrill81
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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Fri Jan 12, 2018 6:11 pm

thangngo wrote:
Fri Jan 12, 2018 6:04 pm
One still needs to plan for the worst, i.e. lost of job, medical emergencies, etc. Think about 911 events and what if it happened to you. Maybe it's not that worse, but still a 3 to 6 month expenses EF is recommended for most people.
I'm not saying that an irregular expense fund should replace an emergency fund; we have one that covers about three months' expenses. But I have noticed that the 'emergencies' we once experienced are no longer.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

trigger08
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Re: Our 'cure' for emergency expenses

Post by trigger08 » Fri Jan 12, 2018 6:19 pm

That sounds similar to what we do, except we know it as "envelope budgeting" with some envelopes being sinking funds for expected/irregular expenses (whether known like holiday gifts, or unknown like auto repairs and clothing). Instead of a spreadsheet, I use a personal financial app that does envelope budgeting. But yes, all of this is separate from the true emergency fund.

IowaFarmWife
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Re: Our 'cure' for emergency expenses

Post by IowaFarmWife » Fri Jan 12, 2018 8:32 pm

trigger08 wrote:
Fri Jan 12, 2018 6:19 pm
That sounds similar to what we do, except we know it as "envelope budgeting" with some envelopes being sinking funds for expected/irregular expenses (whether known like holiday gifts, or unknown like auto repairs and clothing). Instead of a spreadsheet, I use a personal financial app that does envelope budgeting. But yes, all of this is separate from the true emergency fund.
Can I ask what app you use?

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Re: Our 'cure' for emergency expenses

Post by radiowave » Fri Jan 12, 2018 8:59 pm

We use a 3 category approach:
- normal day to day expenditures
- capital expenses (e.g. we bought a new car this year to replace our ageing Honda CR-V which I got to 174k miles).
- and mortgage.

I use the normal expenses as a gauge of future expense in retirement and "opportunities" for improvement. Capital expenses by nature are lumpy so that adds a bit of uncertainty but some things are planned (new car, roof replacement HVAC ); and mortgage is a known fixed payment + additional payment towards capital. This is a way for us to gauge our goals for retirement in a few years to help us cross the finish line of having mortgage paid off and enough in our retirement accounts and SS/Pensions to fund normal expenses and capital expenditures. I usually look at a moving average each month and annually add everything to my spreadsheet.
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Re: Our 'cure' for emergency expenses

Post by radiowave » Fri Jan 12, 2018 9:00 pm

radiowave wrote:
Fri Jan 12, 2018 8:59 pm
We use a 3 category approach:
- normal day to day expenditures
- capital expenses (e.g. we bought a new car this year to replace our ageing Honda CR-V which I got to 174k miles).
- and mortgage.

I use the normal expenses as a gauge of future expense in retirement and "opportunities" for improvement. Capital expenses by nature are lumpy so that adds a bit of uncertainty but some things are planned (new car, roof replacement HVAC ); and mortgage is a known fixed payment + additional payment towards principal. This is a way for us to gauge our goals for retirement in a few years to help us cross the finish line of having mortgage paid off and enough in our retirement accounts and SS/Pensions to fund normal expenses and capital expenditures. I usually look at a moving average each month and annually add everything to my spreadsheet.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

Engineer250
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Re: Our 'cure' for emergency expenses

Post by Engineer250 » Sat Jan 13, 2018 1:57 am

willthrill81 wrote:
Fri Jan 12, 2018 5:46 pm
Replacing something like HVAC equipment is not usually an unexpected expense; you can usually see it coming and save for it appropriately. Specifically, replacing HVAC components is often all that's really necessary, and the expense for that is usually under $1k in my experience.
Cool, I hope I can predict the future like this. Big wind storm blew in a few years ago and I had to get a new roof for around $10k. To my mind, that was a genuine emergency fund expense. Since I've moved into my house I also got a new clothes dryer. That was probably less than $400 and not something I had to dig into my emergency fund for. I think assuming you can "predict" big expenses that are going to fail is folly. That said, not everyone needs an emergency fund. I'm glad I had mine for the roof. Sure I could have put it on credit card, taken out a HELOC, or done some other loan for it. But I'm glad I didn't have to.
TravelforFun wrote:
Fri Jan 12, 2018 5:48 pm
I put large unanticipated expenses on my credit card and pay off the balance when due by selling a little bit of my bond funds.

TravelforFun
Those with sizeable amounts in taxable accounts are good examples of people who don't need a separate emergency fund. Money is money. Whether you call it your emergency fund or your "freedom fund" or it's part of your taxable retirement or living expenses, money is money.
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Re: Our 'cure' for emergency expenses

Post by AlohaJoe » Sat Jan 13, 2018 2:21 am

IowaFarmWife wrote:
Fri Jan 12, 2018 8:32 pm
trigger08 wrote:
Fri Jan 12, 2018 6:19 pm
That sounds similar to what we do, except we know it as "envelope budgeting" with some envelopes being sinking funds for expected/irregular expenses (whether known like holiday gifts, or unknown like auto repairs and clothing). Instead of a spreadsheet, I use a personal financial app that does envelope budgeting. But yes, all of this is separate from the true emergency fund.
Can I ask what app you use?
You Need A Budget (YNAB) is the best known "envelope budgeting" software out there at the moment.

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Re: Our 'cure' for emergency expenses

Post by ASpenderInRecovery » Sat Jan 13, 2018 7:16 am

willthrill81 wrote:
Fri Jan 12, 2018 5:06 pm
About six years ago, my wife and I read Mary Hunt's book "Debt-Proof Your Marriage," which was a good read. What was the most valuable piece of information we got from her was the idea of a 'freedom fund', an account used to save and pay for irregular expenses. Why we hadn't thought of this before, I don't know, but it made sense to us both. The basic idea is that you take your anticipated irregular expenses and then save for them on a regular basis so that you have the funds available to pay for them when they arise. A simple example would be vehicle tags. These are usually paid annually, so you just take the annual expense (e.g. $180), divide it by your savings periods (e.g. 12 months), and then save that amount ($15 per month). You then do this for all of your irregular expense categories, refining your estimated expenses as go.

This has worked fantastically for us. We now keep our 'freedom fund' as a savings account with Ally, and I track all of the categories for expenses in an Excel spreadsheet. I make note of our monthly credits and debits each category as well as our remaining balance in each category. Most months, we have a net 'in-flow' to the account, but sometimes we have a net 'out-flow'. After having done this for years, we now have very good estimates for what we need in each category, but we are constantly tweaking it as needed.

Some of our irregular expense categories are vehicle maintenance/taxes, home maintenance, HOA dues, clothing, gifts, 'allowances' for myself and my wife, and travel. On occasion, we have found that we need to spend more than what we have saved in a particular category. This has not been a problem as one category may be in the red, but there is enough 'black' in the others to cover the temporary short-fall. When this has happened, we usually find that we just need to increase our savings for the short category going forward and are back in black across the board in short order. If it's a discretionary expense, such as clothing, we nearly always refuse to spend what we don't have already saved in that category.

Since we've done this, I can honestly say that we have not had one month where we encountered an emergency expense that we didn't have the funds to immediately cover. We've had unexpected expenses come up, like when I made a stupid mistake and blew out both tires on one side of our car last year, but we've always had enough to cover them. Those things that used to be 'emergencies expenses' have just vanished. Plus, we have adequate insurance in all of the key areas and enough to cover deductibles. A job loss would be unfortunate since we are a single-income family, but I always work under multi-year contracts and would be know about that well before it actually occurred; we've been very blessed in that regard.

Maybe our experiences will help someone else. YMMV.
Interesting approach to budgeting. I’m sure your ability to predict outflows has become much more accurate given the granularity your are going into on your irregular expenses.

I saw another post a couple weeks back where an emergency fund was reframed as “Cash Reserves” which I like alot and helped me sell the importance of saving up to my wife. I agree with others that the word emergency fund carries a negative connotation as it implies something catastrophic is going to happen. I realize over the course of life many emergencies do happen so a “emergency fund” is necessary and I keep 6 months expenses around for it. What I’ve realized in talking to many younger folks is the wording of “emergency fund” has a negative enough connotation to where young folks discount the need for it because they just think, “I’m young, healthy, have a good job, have insurance so why do I need to put this money aside for?” In my attempt to help younger folks become more financially literate I’ve started reframing the EF as Cash Reserves and people get it immediately and start thinking of all the long term goals and large expenses they have down the road like down payment on a home, money for an engagement ring, car replacement, etc. IMO coaching people to establish some kind of EF fund is success as they now have a buffer and will start to think more strategically about spending/saving money as they become more mature. Like they say, the rising tide lifts all boat. Isn’t that part of the Boglehead mission?

I do a zero-balance budget each month and project my inflows and outflows. Since I’m in sales my inflows can fluctuate wildly from month to month so nailing down my monthly outflows between the fixed expenses and “irregular expenses” is key so I can properly allocate the maximum to saving/investing without overdoing it and having to go back and withdraw money from savings for an irregular expense that pops up. My approach to large down the road expenses like a car replacement or even annual vacation fund is somewhat different in that I project what I’ll need in the future then divide up the remaining monthly contributions to get there and add it as a line item to my zero balance budget. Ultimately these large future purchases can be lumped into Cash Reserves and ideally built ontop of your 6 month EF.

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Re: Our 'cure' for emergency expenses

Post by LadyGeek » Sat Jan 13, 2018 9:18 am

The wiki has some background info: Emergency fund
Wiki wrote:An emergency fund is a cash reserve required to meet unanticipated needs for cash, such as medical bills, car or home repair, or job loss.
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Re: Our 'cure' for emergency expenses

Post by LuckBeALady » Sat Jan 13, 2018 10:09 am

We found the same thing: starting a "sinking fund" of about 800 a month (which included car insurance, life insurance, car registration, clothing, medical, gifts, other once-yearly expenses) helped revolutionize our financial lives. These are predictable expenses but there was a time when a $300-$500 bill was a big hit to our monthly budget if not planned. It kept those bills from going on a credit card and adding up to a mountain of debt.

We were pretty foolish about spending at one time. I know many here don't love Dave Ramsey, but as annoying and abrasive as he is he changed our lives with regard to spending money we didn't have.

Now, with daycare and college expenses a thing of the past, we cashflow the vast majority of those bumps, plus we have a well-padded emergency fund for the big stuff like job loss or a roof.

In retrospect, it seems pretty dumb that a yearly car registration bill was a "surprise" and hard to manage. There's hope for financial illiterates!

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Re: Our 'cure' for emergency expenses

Post by spammagnet » Sat Jan 13, 2018 10:32 am

trystero wrote:
Fri Jan 12, 2018 6:10 pm
... wife and I do the same as OP, but in fact split these items into two accounts - Irregular Required and Irregular Optional. ...
As mentioned by others, I use YNAB and am happy with it as a budget tool. It's not very helpful for longer term forecasting (I use Excel for that) but helps us adhere to our plan better than other approaches do.

I won't belabor the discussion about distinguishing income loss emergency funds from unforeseen big ticket repairs and foreseeable big ticket repairs and replacement, but I like the idea of distinguishing required irregular expenses from optional irregular expenses.

Emergency funds and other distinctions wouldn't seem to matter once you're retired. It's all one big fund, regardless of how you use it. I think the important point then would be to moderate discretionary spending to stay under your planned SWR. I'm not there yet but assume that variable large expenses such as roof replacement requires use of a moving average. You can't very well decide not to eat for a few months because your roof repair causes you to exceed your planned SWR for a given year.

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Re: Our 'cure' for emergency expenses

Post by spammagnet » Sat Jan 13, 2018 10:39 am

ASpenderInRecovery wrote:
Sat Jan 13, 2018 7:16 am
I saw another post a couple weeks back where an emergency fund was reframed as “Cash Reserves” which I like alot and helped me sell the importance of saving up to my wife. ... I do a zero-balance budget each month and project my inflows and outflows. ...
Try YNAB. It automates/simplifies the process you describe. They have a free trial.

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Re: Our 'cure' for emergency expenses

Post by nolesrule » Sat Jan 13, 2018 10:47 am

I use YNAB4. Unfortunately they don't sell it anymore. It was a one-time purchase rather than an on-going subscription, and it had more flexibility of functionality and better cash flow awareness than the newer version (which is online) has. I have chosen not to upgrade. Not sure what I'll do when OS upgrades kill YNAB4.

If you have a spreadsheet that meets your needs and isn't too difficult to manage, stick with it. I haven't found any software out there that does it as well as YNAB4 did/does.

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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Sat Jan 13, 2018 11:06 am

Engineer250 wrote:
Sat Jan 13, 2018 1:57 am
willthrill81 wrote:
Fri Jan 12, 2018 5:46 pm
Replacing something like HVAC equipment is not usually an unexpected expense; you can usually see it coming and save for it appropriately. Specifically, replacing HVAC components is often all that's really necessary, and the expense for that is usually under $1k in my experience.
Cool, I hope I can predict the future like this. Big wind storm blew in a few years ago and I had to get a new roof for around $10k.
Our homeowners' insurance would cover that. The deductible is $1k.

In the past, we had a marginal HVAC system, and through investigation and discussion with some specialists, we learned that complete replacement is rarely necessary. It's far easier and cheaper to replace specific components as needed, with a cost not often exceeding $1k. If someone is wanting to upgrade their entire system, that's something that is expected and can be budgeted for over time.

Those living in older homes probably need to budget for comparatively high home maintenance expenses.
Last edited by willthrill81 on Sat Jan 13, 2018 11:21 am, edited 1 time in total.
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Re: Our 'cure' for emergency expenses

Post by IowaFarmWife » Sat Jan 13, 2018 11:15 am

LuckBeALady wrote:
Sat Jan 13, 2018 10:09 am
We found the same thing: starting a "sinking fund" of about 800 a month (which included car insurance, life insurance, car registration, clothing, medical, gifts, other once-yearly expenses) helped revolutionize our financial lives. These are predictable expenses but there was a time when a $300-$500 bill was a big hit to our monthly budget if not planned. It kept those bills from going on a credit card and adding up to a mountain of debt.
Yes, that was our issue too.

We were pretty foolish about spending at one time. I know many here don't love Dave Ramsey, but as annoying and abrasive as he is he changed our lives with regard to spending money we didn't have.

He really turned our spending habits around, too.

Now, with daycare and college expenses a thing of the past, we cashflow the vast majority of those bumps, plus we have a well-padded emergency fund for the big stuff like job loss or a roof.
Yep, and I am working like crazy to get the EF even higher.

In retrospect, it seems pretty dumb that a yearly car registration bill was a "surprise" and hard to manage. There's hope for financial illiterates!

Yes, and birthdays were surprises, Christmas was a surprise, my Dept. of Health dues were a surprise. Dumb, dumb, dumb. But I did learn! :)

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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Sat Jan 13, 2018 11:25 am

IowaFarmWife wrote:
Sat Jan 13, 2018 11:15 am
LuckBeALady wrote:
Sat Jan 13, 2018 10:09 am
We found the same thing: starting a "sinking fund" of about 800 a month (which included car insurance, life insurance, car registration, clothing, medical, gifts, other once-yearly expenses) helped revolutionize our financial lives. These are predictable expenses but there was a time when a $300-$500 bill was a big hit to our monthly budget if not planned. It kept those bills from going on a credit card and adding up to a mountain of debt.
Yes, that was our issue too.

We were pretty foolish about spending at one time. I know many here don't love Dave Ramsey, but as annoying and abrasive as he is he changed our lives with regard to spending money we didn't have.

He really turned our spending habits around, too.

Now, with daycare and college expenses a thing of the past, we cashflow the vast majority of those bumps, plus we have a well-padded emergency fund for the big stuff like job loss or a roof.
Yep, and I am working like crazy to get the EF even higher.

In retrospect, it seems pretty dumb that a yearly car registration bill was a "surprise" and hard to manage. There's hope for financial illiterates!

Yes, and birthdays were surprises, Christmas was a surprise, my Dept. of Health dues were a surprise. Dumb, dumb, dumb. But I did learn! :)
That was part of my point in the OP. When I started budgeting and saving for irregular expenses, most of the expenses that were once 'emergencies' suddenly were not so any more.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Sat Jan 13, 2018 11:30 am

LadyGeek wrote:
Sat Jan 13, 2018 9:18 am
The wiki has some background info: Emergency fund
Wiki wrote:An emergency fund is a cash reserve required to meet unanticipated needs for cash, such as medical bills, car or home repair, or job loss.
I agree that medical bills or job loss are usually unanticipated (though the likelihood of them happening to us at some point is fairly high), but car or home repairs are far from entirely so. Those of us with cars or houses should realize that repairs are a necessary cost of ownership and budget accordingly. Certain repairs could certainly come up that cost more than we have budgeted or saved for, but I think that this should be the exception rather than the rule.

I'm not saying that an irregular expense fund is a replacement for an emergency fund. But I think that for many, perhaps most, both are needed.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Our 'cure' for emergency expenses

Post by spammagnet » Sat Jan 13, 2018 12:36 pm

willthrill81 wrote:
Sat Jan 13, 2018 11:30 am
I'm not saying that an irregular expense fund is a replacement for an emergency fund. But I think that for many, perhaps most, both are needed.
Agreed. I have 3 tiers:

Predictable irregular expenses like normal car maintenance, occasional unplanned repairs, insurance premiums, etc.
-- Accumulate as foreseeable based on average expenses and known scheduled bills
Unexpected big ticket repairs like appliance failure or major car repairs
-- A couple grand (as your income permits) to be used if unavoidable expenses exceed anticipated costs. Replete as income permits when you use it.
Income/job loss
-- X months' net income, as your income and comfort level permit.

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Re: Our 'cure' for emergency expenses

Post by TheHouse7 » Sat Jan 13, 2018 1:44 pm

nolesrule wrote:
Sat Jan 13, 2018 10:47 am
I use YNAB4. Unfortunately they don't sell it anymore. It was a one-time purchase rather than an on-going subscription, and it had more flexibility of functionality and better cash flow awareness than the newer version (which is online) has. I have chosen not to upgrade. Not sure what I'll do when OS upgrades kill YNAB4.

If you have a spreadsheet that meets your needs and isn't too difficult to manage, stick with it. I haven't found any software out there that does it as well as YNAB4 did/does.
YNAB4 is the best, getting our budget straight brought us to this fork in the road of going with older updated YNAB4 or a subscription per month.

Excel is probably still the "right" tool, but it doesn't look as nice. :annoyed

Being one month ahead of expenses is our "first line of defense."
(Using last months income for this months expenses.)
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

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Re: Our 'cure' for emergency expenses

Post by Palatineman » Sat Jan 13, 2018 7:24 pm

spammagnet wrote:
Sat Jan 13, 2018 12:36 pm
willthrill81 wrote:
Sat Jan 13, 2018 11:30 am
I'm not saying that an irregular expense fund is a replacement for an emergency fund. But I think that for many, perhaps most, both are needed.
Agreed. I have 3 tiers:

Predictable irregular expenses like normal car maintenance, occasional unplanned repairs, insurance premiums, etc.
-- Accumulate as foreseeable based on average expenses and known scheduled bills
Unexpected big ticket repairs like appliance failure or major car repairs
-- A couple grand (as your income permits) to be used if unavoidable expenses exceed anticipated costs. Replete as income permits when you use it.
Income/job loss
-- X months' net income, as your income and comfort level permit.
+1

I use the same categorization. Created a simple excel sheet with Yearly and Monthly Income (take home pay after taxes) versus expenses, which calculates the savings per month with a 3 year horizon prediction (if things stay stable) and what is available at this point and time from a cash standpoint.

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Re: Our 'cure' for emergency expenses

Post by trigger08 » Sat Jan 13, 2018 7:54 pm

IowaFarmWife wrote:
Fri Jan 12, 2018 8:32 pm
trigger08 wrote:
Fri Jan 12, 2018 6:19 pm
That sounds similar to what we do, except we know it as "envelope budgeting" with some envelopes being sinking funds for expected/irregular expenses (whether known like holiday gifts, or unknown like auto repairs and clothing). Instead of a spreadsheet, I use a personal financial app that does envelope budgeting. But yes, all of this is separate from the true emergency fund.
Can I ask what app you use?
I use Banktivity. I think I looked into YNAB at one point but it is a subscription service now. It sounds like the old version was wonderful though.

ThreeBears
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Re: Our 'cure' for emergency expenses

Post by ThreeBears » Sat Jan 13, 2018 9:11 pm

We just pray that we don't have emergencies . . . so far it's worked. It's kinda a bogglehead approach, as it's been very low-cost . . . so far.

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Re: Our 'cure' for emergency expenses

Post by SkullBaseSurgeon » Sat Jan 13, 2018 9:31 pm

ASpenderInRecovery wrote:
Sat Jan 13, 2018 7:16 am
[...] I saw another post a couple weeks back where an emergency fund was reframed as “Cash Reserves” [...]
I like this so much that I just renamed my Capital One Savings Acct from "Emergency Fund" to "Cash Reserves"! :happy

TwstdSista
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Re: Our 'cure' for emergency expenses

Post by TwstdSista » Sun Jan 14, 2018 4:16 am

We refer to our emergency account as "savings".

I learned to leave enough money in checking years back when my auto insurance company started charging for monthly payments. No way was I paying that fee! So I built a buffer into my checking account and that's worked ever since. The only buffer I don't have anymore is for property taxes -- those are large enough that I transfer $ to savings on a monthly basis and just pull it back twice a year out when the payment is due.

ASpenderInRecovery
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Re: Our 'cure' for emergency expenses

Post by ASpenderInRecovery » Sun Jan 14, 2018 7:23 am

SkullBaseSurgeon wrote:
Sat Jan 13, 2018 9:31 pm
ASpenderInRecovery wrote:
Sat Jan 13, 2018 7:16 am
[...] I saw another post a couple weeks back where an emergency fund was reframed as “Cash Reserves” [...]
I like this so much that I just renamed my Capital One Savings Acct from "Emergency Fund" to "Cash Reserves"! :happy
Same here. Immediately renamed my Ally account and started combining additional funds ontop for my car replacement which I had previously kept seperately. I also intend on letting it grow substantially in preparation for replacing my wife’s car in 2 years. Longer term would be excess cash reserves for a larger down payment on my next home assuming we need more space if we decide to have kids.

YNAB sounds great but for those wanting to use excel you can search “budget” within their templates and you will find a monthly budget that is essentially a zero balanced budget which you can tweak to include all expenses and then add rows for monthly savings and investment allocations. All you will need is your monthly take home to complete the picture.

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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Sun Jan 14, 2018 5:08 pm

ThreeBears wrote:
Sat Jan 13, 2018 9:11 pm
We just pray that we don't have emergencies . . . so far it's worked. It's kinda a bogglehead approach, as it's been very low-cost . . . so far.
I hope you're not serious.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Our 'cure' for emergency expenses

Post by Prov227 » Sun Jan 14, 2018 10:26 pm

Bank account #1 - Everyday checking for monthly expenses and giving.

Bank account #2 - Savings for very predictable, but irregular expenses (annual property tax, annual Christmas spending, annual life insurance, annual home insurance, semi-annual auto insurance, semi-annual DW's gym, etc). Easy transfer to Acct #1 when payments are made.

Bank account #3 - Savings for vacations, home improvements/appliances/furniture, and vehicle maintenance & replacement. Excel spreadsheet to track the individual balances of each of these sub-account categories. Easy transfer to Acct #1 whenever these events arise.

Bank account #4 - Emergency Fund, a stash of cash not earmarked for anything. Comes in handy once in a while to quickly fix the kinds of problems that money can sometimes fix. And helps us sleep well at night (especially DW). Easy to transfer to Acct #1 in the very rare event of needing to touch these funds.
Last edited by Prov227 on Tue Jan 16, 2018 7:41 am, edited 1 time in total.
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Re: Our 'cure' for emergency expenses

Post by spammagnet » Sun Jan 14, 2018 10:29 pm

willthrill81 wrote:
Sun Jan 14, 2018 5:08 pm
ThreeBears wrote:
Sat Jan 13, 2018 9:11 pm
We just pray that we don't have emergencies . . . so far it's worked. It's kinda a bogglehead approach, as it's been very low-cost . . . so far.
I hope you're not serious.
From bogglehead, one may draw that conclusion.

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Re: Our 'cure' for emergency expenses

Post by shawndoggy » Sun Jan 14, 2018 10:46 pm

My wife and I have run this kind of system for years. We basically have a word file that's a table with budget categories and amounts (so stuff like "insurance" and "new car" and "safety" (which is our emergency fund)). We print a sheet for each month and then manually subtract expenses against each category as we go. I like to explain it to others as a long countertop lined with virtual cookie jars that we fill a little every month. We even do his and hers spending money (i.e. money to spend on stuff that we want without clearing with one another).

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Re: Our 'cure' for emergency expenses

Post by willthrill81 » Sun Jan 14, 2018 11:50 pm

shawndoggy wrote:
Sun Jan 14, 2018 10:46 pm
My wife and I have run this kind of system for years. We basically have a word file that's a table with budget categories and amounts (so stuff like "insurance" and "new car" and "safety" (which is our emergency fund)). We print a sheet for each month and then manually subtract expenses against each category as we go. I like to explain it to others as a long countertop lined with virtual cookie jars that we fill a little every month. We even do his and hers spending money (i.e. money to spend on stuff that we want without clearing with one another).
I've found that an Excel spreadsheet makes it very easy and keeps me from making dumb math errors. But whatever works for you is good enough!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Our 'cure' for emergency expenses

Post by Carter3 » Mon Jan 15, 2018 12:44 am

spammagnet wrote:
Sun Jan 14, 2018 10:29 pm
willthrill81 wrote:
Sun Jan 14, 2018 5:08 pm
ThreeBears wrote:
Sat Jan 13, 2018 9:11 pm
We just pray that we don't have emergencies . . . so far it's worked. It's kinda a bogglehead approach, as it's been very low-cost . . . so far.
I hope you're not serious.
From bogglehead, one may draw that conclusion.
Now that's funny right there ( in my Larry the Cable Guy voice)

PeterParker
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Re: Our 'cure' for emergency expenses

Post by PeterParker » Mon Jan 15, 2018 12:37 pm

For you people with 2-4 "emergency savings" accounts --- I'm just curious.


You do realize that despite being very liquid, you are potentially (depending on how much money you have in an emergency fund) --- holding more of your total assets in cash? Do you ever consider that?


Like your total asset mix could be something like: 60% stock equity, 15% bonds, 15% cash. (let's take out property for now).


For me personally, although some may consider it heresy here ... well I hold most all my cash in my checking account (for better or worse) - just because that's where I pay all bills from.

But then I don't carry the full emergency fund(s) in the checking ... I consider whatever I can get by with, I'll throw the rest into stock/equity mostly. The point being ... well stocks are fairly liquid. You can liquidate them and have cash in a business day or two. Usually savings aren't THAT much faster (if not slower) -- if they're fully online like Ally or Barclays. Let's not forget that credit cards (when auto-paid in full each month) provide huge liquidity as well, much higher than even a savings account. (And can be paid 31-60 days later with the liquidated stock indices). But your emergency fund can be making returns, at least.

So unless there's a situation where you need something like $10,000, in cash, TODAY (I think impossible in many savings accounts anyway) what is the point of holding your entire emergency fund in a cash position? I think the primary reason is that it is clearly 'demarcated' as the emergency fund, and is easier to see and look at conceptually. You could also 'earmark' this in third party software though, potentially.

PatrickA5
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Re: Our 'cure' for emergency expenses

Post by PatrickA5 » Mon Jan 15, 2018 1:28 pm

We used to do something similar. We basically had a separate checking account that we paid monthly as well as quarterly/annual expenses from. We'd direct deposit an amount equal to 1/24th of theses expenses each payday. Then the bills would be direct debited from the account automatically. It wasn't an emergency fund, but an account that paid all of our known bills. Non-recurring things like food were paid for out of another account. It worked great for years. Then I started playing the credit card game paying for everything using credit cards, which made paying things using separate checking accounts more difficult. So, we stopped.

DrGoogle2017
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Re: Our 'cure' for emergency expenses

Post by DrGoogle2017 » Mon Jan 15, 2018 2:11 pm

In my working years, a true emergency was job loss for both spouses. High medical bills were covered by health insurance.

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Re: Our 'cure' for emergency expenses

Post by LuckBeALady » Mon Jan 15, 2018 2:52 pm

PeterParker wrote:
Mon Jan 15, 2018 12:37 pm


But your emergency fund can be making returns, at least.
...or alternatively, losing value...(I read somewhere that stocks DO lose value from time to time :shock: )

My emergency fund is in a checking account earning 4.79%. I use YNAB to electronically separate it into categories. I have plenty riding in the stock market; I count this money as part of my "bonds/cash" ratio. So, my emergency fund IS making returns.

My risk tolerance is not high enough to keep every single dollar invested in the stock market. I've seen the SHTF more than once, and I know it's a fine thing to have cash at your fingertips.

I've learned from the wise souls on this board that there is a happy medium for everyone, somewhere between having all your money invested in bitcoin and keeping it all in the mattress. You decide where your own comfort zone lies.

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celia
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Re: Our 'cure' for emergency expenses

Post by celia » Mon Jan 15, 2018 2:53 pm

Our "freedom fund" has always been part of our checking account. Why make it complicated?

We never ended up with a year's worth of once-yearly expenses all in the checking account at once because they are all due in different months, give or take.
Last edited by celia on Mon Jan 15, 2018 2:56 pm, edited 1 time in total.

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Re: Our 'cure' for emergency expenses

Post by sailaway » Mon Jan 15, 2018 2:55 pm

celia wrote:
Mon Jan 15, 2018 2:53 pm
Our "freedom fund" has always been part of our checking account. Why make it complicated?
I have two take aways from this thread:

-Most people take awhile to get budgeting dialed in.
-A lot of people make their finances complicated.

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Re: Our 'cure' for emergency expenses

Post by The Wizard » Mon Jan 15, 2018 3:16 pm

celia wrote:
Mon Jan 15, 2018 2:53 pm
Our "freedom fund" has always been part of our checking account. Why make it complicated?

We never ended up with a year's worth of once-yearly expenses all in the checking account at once because they are all due in different months, give or take.
Same here basically, as I think I mentioned upthread.
When I retired a few years back, I found it good to increase my average checking account balance to cover increased travel expenses better. This helps "buffer" variable expenses better and seems to work for me...
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