How Do You Budget Money for Emergencies?

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?

10 Responses to How Do You Budget Money for Emergencies?

  1. Crystal @ Prairie Ecothrifter says:

    Mr. BFS and I keep $10,000 in a hardcore emergency fund – like the “don’t touch unless you are in pain” emergency fund. That’s enough to cover 3-4 months of expenses or the highest deductible we’d ever have to pay annually with our insurance plan (we’d have to have like $50,000 in bills or more to reach our max out-of-pocket of $9500 a year though).

    We also keep $10,000 in padding in our blog income account, which is the one we pay our biweekly salary out of. So it fluctuates and will sometimes dip below that $10k mark, but it is enough padding for 3 paychecks…so if we just make nothing for 6 weeks straight, we’re okay. And we can cut expenses overnight enough that the two accounts together can cover us for 6-8 months.

    Small emergencies are usually lumped into our regular monthly expenses or taken out of the home/auto maintenance account, vacation account, or fun money accounts if necessary. We add to all of those monthly so they are ready for us when needed.

  2. A small item like a hairdryer is just a household expense, which comes out of our regular checking account as general spending.

  3. Considering I am very half assed out my budgeting, this stuff just comes out of my checking account. If I don’t happen to have enough for it, I sometimes dip into my line of credit. I do try to keep a few month’s worth of expenses at hand just in case though. Keeping 6-12 months easily available seems way too extreme for me. I think it would be better to invest most of that money somewhere that could be liquidated within a few days if necessary.

  4. Kathleen @ Frugal Portland says:

    I recently had to use my emergency fund when I accidentally overpaid on one of my loans. That’s when I realized that’s what these funds are for — when you need the money, it’s there.

  5. I have an emergency fund for true emergencies only and then I have a random expenses fund that covers things like your broken hair dryer or tires etc. I put away probably about 75 a paycheck in there. Sometimes it grows and sometimes it disappears!

  6. We just pay these things out of cash flow. This will sound like poor financial management, but we’re blessed to have a strong household income. We don’t even really plan for fairly expensive things like annual car insurance or property tax, we just pay them out of cash flow and it affects our ability to save/pay down the mortgage. It’s more like your 10K emergency fund. We try to keep $X in some accounts, whenever they go two or three grand over, we lump sum pay down the mortgage. Money just goes there, so whenever we’re under, we just let the money accumulate again until we’re over.
    Sorry, that’s a super long comment to say very little.

  7. david says:

    I am in my forties and I still do not have even 3 months of emergency funds set aside let alone a full 12 months. If you have that, then that is truly great.

    i have never been able to achieve that level of savings though.

    I guess I better figure out how though!

  8. Jon says:

    We keep one emergency fund account (which we are still building up), which we keep for big emergencies. For example, we had to replace a rack and pinion last month… $1,200 later we saw the importance of the emergency fund!!

    For things like a hairdryer, that comes out of our regular monthly budget as well. Emergency fund is for strictly emergencies.

  9. Simple Rich Living says:

    I am currently building an emergency fund that will be for emergencies as well as a kind of slush fund to pay for annual expenses such as car insurance. My goal is $10K. Once $10K is reached, I will continue to contribute monthly on things like car insurance to this account so I can take the money out every year to pay for car insurance. However, the emergency contribution portion of it will stopped.

  10. It’s funny what things trigger your thought processes. The other day, I was at a drive through and the cashier handed my beverage to me with my debit card at the same time and I had to grab the drink with the debit card laying right against it with one hand. It got me thinking about tangent lines, then my wife called me a dork. LOL. Great job though, I have an emergency fund, and thankfully haven’t had to touch it.

    Thanks,
    Timothy

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