Rethinking Finance​: Lessons from a failed emergency fund

In order to pay off our car, we took the baby step of having an emergency fund to fall back on as we crushed our debt.  With our trial run, we made a few mistakes along the way that served as good lessons for the future.

Lesson #1: Don’t have it so accessible.

We thought we were being smart by having it as cash on hand in an envelope hidden away in our home.  We won’t touch it, we thought.  “It’s only for emergencies”, we said.  We actually did great there for a few months.  Then we saw a rug on Craigslist we just couldn’t live without.  Then we didn’t budget enough for gas one week. Slowly, our emergency fund became our slush fund.  It was too easy to dip into.

Take home:  Maybe keep $500 cash on hand, but the rest, we will put into a high yield checking account at an online savings account (can you believe they are paying over 1.7%?  That’s not bad!).  It will be harder to spend that way, and easier to forget we have it.

Lesson #2:  We didn’t have enough.

Given the above slow depletion by non-emergencies, when a real urgent need did show up, we didn’t have enough.  Out of the blue, the brakes on my wife’s car went out.  This was more money than we anticipated. Then, my brakes on my 17-year-old car went out.  (It was very loud in reminding us).  Like every time we drove it, the car sounded like the Nazgul from Lord of the Rings.   It couldn’t really be ignored any longer (though I drug it out a few weeks).  I went ahead and got the front brakes done. Given the depleted fund, we ended up putting it on a credit card.  We were able to pay it off quickly enough, but it was discouraging to have to do that.

Take home:  Save twice the amount we did last time.

Lesson #3:  Keep adding to it.

Our car payoff was our big grand experiment after paying off the credit cards for our long-term debt blaster plan, and then uber savings plan.  Could we adhere to such a strict budget?  What lessons did we need to learn?  How tight can we really be?  Well, one lesson here was we needed a bigger fund, as well as to keep a trickle of money going to it while we pay-off student loans.  We will have the added benefit of my wife working a few hours per week this next semester as well.  Our plan is to use her income to further bolster our emergency fund.

Take home:  If you take away from your emergency fund, always pay it back as soon as possible.

There you have it. Let’s hope Emergency Fund 2.0 goes a little smoother.

This was published on Rethink Redo Repair.

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