Could You Handle an Unexpected $500+ Expense?
Your transmission goes out. (Or your air conditioning, dishwasher, or some other expensive item that you’d really rather not do without.)
What do you do?
*plays the Jeopardy song while you think about it*
If your answer was anything other than “Buy a new one using money I’ve got in the bank” or “Wait to buy a new one until I have the money”, you need at least one of these two things:
- An emergency fund
- And possibly also a sinking fund
That’s because life’s little (and not so little) unexpected events happen to everyone. Failing to plan for them leaves you scrambling and turning to expensive alternatives like debt (which still costs you, even if you end up with a 0% interest rate).
Why two possible funds?
So why either an emergency fund or a sinking fund? Well, an emergency fund is for exactly that: emergencies. But YOU get to define what you will consider an emergency. If you’re going to consider car repairs, household repairs, job loss, medical expense, vet bills, and various other things emergencies, you’re going to need a pretty big fund. Decide what you’ll consider an emergency ahead of time, and then begin sending money to it regularly so that it’s there when you need it.
Some people (like me) consider very few things an emergency. So we use what might be called sinking funds as well. That’s where you have one or more accounts with money in them designated for future spending. In our case, those are things like appliance repairs, vet bills, vacations, household repairs/home improvements, and the taxes and insurance on our house. Stuff that’s not an emergency, but that we still end up spending money on infrequently. (For example, we pay the taxes on our house twice a year.)
It doesn’t matter which way you do it, so long as you do it — and are prepared with a large-enough fund.
Setting up the fund(s)
It’s good to literally keep these types of funds separate from the money you use on a day-to-day basis. That prevents them from accidentally being used for something other than their intended purpose. (Which is important, because you want them to be there when you need them.)
We use ING Direct for ours, which is nice because they let you set up “subaccounts”. That way the purpose of the accounts are clear to us.
What about you? Do you have an emergency fund and a sinking fund? What kinds of things have you used them for, if so?