My fiancée was blow drying her hair the other day when it suddenly shut off. My frantic fiancée – her hair was only halfway dry, which, apparently, can lead to frizziness if allowed to air dry at that point – ran to find me. At first, we thought it might have just been a short circuit, but the thing wouldn’t turn on after I checked the circuit breaker. It wouldn’t turn on after she moved it to another outlet, either. It was busted.
I Googled the price of a new hair dryer on Amazon and the price range was enormous. There were hair dryers for $15, hair dryers for $50, even hair dryers for $200 or more (really? Who needs a $200 hair dryer?). I was so overwhelmed by the number of choices that I basically gave up, deciding my fiancée’s hair would have to fend for itself.
But it did get me thinking – how do you plan for emergencies when it comes to budgeting? Do you factor it into your household budget? Do you set aside money for emergencies – or do you simply pull cash out of your emergency fund when things go awry?
Building Your Emergency Fund
We’re going back to Personal Finance 101 here: the basics of building up your emergency fund. The old rule of thumb said you should have money for three to six months’ worth of expenses in your emergency fund. Since the financial crisis and the sky-high unemployment we’ve seen over the past four years, that advice has changed. Now, financial planners suggest you build up your emergency fund for at least six months’ worth of expenses; some urge you to save up to 12 months’ worth.
Emergency Fund vs. Slush Fund
I have some friends who have, essentially, two emergency funds. The first is the traditional emergency fund I just described – the one you don’t touch except for major emergencies, like a sickness or injury that knocks you out of work for a few months, or a job loss. Their second emergency fund is more of a slush or rainy day fund. They don’t contribute to it religiously; rather, they put in a little bit here, a little bit there, whenever they have the extra cash to do so. Their theory is that this is the account from which they’ll withdraw cash should they need to, say, buy a new hair dryer.
I don’t adhere to the double-emergency fund mindset. It’s one thing to have a year’s worth of expenses locked up in your main emergency fund; setting aside additional money in a secondary emergency fund (slush fund, rainy day fund, whatever) seems pointless. After all, if the money is in a savings account, it’s earning next to nothing in the bank; you could invest it in your 401(k), use it to pay down your debt, make extra mortgage payments with it, etc, where it would actually make money for you.
Budgeting for Small Emergencies
Around here, money for small emergencies – like that hair dryer – come directly out of our monthly budget. After all, replacing something that cost $20 is hardly an emergency – especially if it’s not a necessity. (Note: Please don’t tell my fiancée that I don’t think her broken hair dryer is an emergency. We’re too close to the wedding to call it off.)
When we have one of these minor emergencies around here, we simply dip into our checking account to pay for it. If, for whatever reason, it’s a tight month financially and we don’t really have extra money for emergencies, we’ll trim back in other ways – maybe skipping a dinner out or being more conscious about our energy consumption. We find ways to balance it out, so that by month’s end, we hardly notice the difference.
Budgeting for Big Emergencies
If a broken hair dryer is an emergency, then finding out you need a whole new set of radial tires on the eve of rainy season is a catastrophe of apocalyptic proportions. To me, this is what an emergency fund is truly for. Replacing tires can run close to $1,000, depending on the make and model of your vehicle as well as the type of tires you’re buying. Even if you go with a cheaper tire, you’re still looking at $500 even if you buy and install them through a discount retailer.
In situations like that, I treat my emergency fund like a no-interest credit card. Say I have $10,000 in that fund, and need $1,000 to buy tires, or a new water heater… or a really high-end hair dryer (sense the sarcasm?). Instead of putting the $1,000 on an actual credit card – where I’d have a single month to pay it off in full before incurring interest – I take the money for emergencies out of my emergency fund. Now, I only have to worry about paying myself back. Since I won’t have to deal with interest, I can add a couple hundred bucks to the fund every month until I’ve completely replenished it.
Readers, how do you budget for emergencies? How does your plan differ for big emergencies vs. small ones?