An Emergency Fund is Essential For Our Family

Job loss. Unexpected illness or injury.  Theft.

When my family first decided to open an emergency fund, it was to protect ourselves against these major unexpected financial expenses.  While that continues to be a reason we maintain an emergency fund, it is the smaller unexpected expenses that make this account essential to us.

As I outlined in a separate article, we learned to better understand our monthly expenses and know approximately how much we spend in a typical month.  This is important to us because part of our paycheck goes to monthly expenses and the rest is automatically invested or put toward our mortgage.  In order to have fairly stable monthly expenses, we need to account separately for the inevitable small expenses that arise at unexpected times.

Consider the various unexpected expenses we incurred in the last 12 months, mostly from my wife’s nine year old Jeep Grand Cherokee:

  • $115.60 new car battery for my car in July 2016
  • $236.46 new car battery for wife’s car in October 2016
  • $441.93 new ignition switch starter for wife’s car in November 2016
  • $309.26 two new tires for wife’s car in January 2017
  • $129.33 replacement tire holder for wife’s car in February 2017
  • Grand total: $1,232.58 last 12 months

While these expenses are not job loss or illness-level expenses, they are large enough to alter the monthly budget our family has in place.  That may mean the next trip to the auto repair shop puts our monthly expenses over the amount we have in our checking account.

Luckily we are no longer strapped with student loan debt and we have two paid-off cars.  Instead of putting extra month toward debt, we are able to put extra money toward retirement, kids’ educations and taxable investments.  So theoretically we could dip into the taxable investment account without penalty to fund unexpected expenses.

But these investment accounts are set up to save for future goals.  The intention is not to use them for costs today, but rather to let them compound over many years in the stock market.  If we leaned on these accounts for small emergencies, it would degrade our ability to accurately save for the future goals we set for our family.

Enter — The Emergency Fund

The first line of defense when unexpected expenses arise is our emergency fund.  We keep our emergency fund in a high interest savings account at Ally Bank (LOL at “high interest,” but 1% is about as high as you can get these days).  We are normally fairly aggressive with our money, wanting to place it in the market to maximize earning potential, especially while we are young.  But we treat an emergency fund as just that — an emergency fund.  If the need arises to access the money in this account, it doesn’t matter if the market has recently crashed…all of our money will be there.

Our emergency fund is more than just a defense against major unexpected financial expenses.  We use it when small unexpected financial expenses, like car repairs, arise.  Since these small unexpected expenses are actually quite expected over time, we continually replenish the emergency fund with automatic deposits of $100 each month since our unexpected annual expenses have averaged about $1,200 per year recently.

Essentially, we are self-insuring our monthly budget by keeping a separate account for expenses outside our regular budget.  This accomplishes two things for us:

  1. Helps us maintain a fairly steady spending budget month-to-month since we do not include unexpected expenses.
  2. Significant peace of mind.  When the call from the auto repair shop comes that we need a new ignition switch (huh?) for $450, we do not worry about where the money will come or suddenly need to substantially cut other expenses that month.

How Much We Keep In An Emergency Fund

Many financial experts say 3-6 months of living expenses is appropriate for an emergency fund and can help offset short-term job loss or unexpected expenses.  My wife and I have maintained about 5-6 months in our emergency fund for the last four years.

We keep our emergency fund at the upper end of the recommended range for three primary reasons:

  1. We use it to offset small unexpected expenses since we only maintain enough cash in our checking account to pay that month’s regular expenses. The rest is invested.  So the savings account that holds our emergency fund is the first and only line of defense before we would need to sell some investments.
  2. We own a 92 year old house.  Yes, we have insurance.  But small fixes are frequently necessary.  The house — knock on wood — was free from any unexpected expenses this past year.  But having lived here since 2012, I know this is not a typical year.
  3. We have young children.  They break stuff.  They draw on stuff.  Everyday is an adventure.  Everyday is unexpected.

Everyone’s situation is different.  How do you approach saving for emergencies?  Do you set money aside, or do you rely on credit cards as your only backup plan?

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2017-04-17T11:10:24+00:00 March 21, 2017 7:08 am|Categories: Budgeting, Featured|Tags: , |9 Comments


  1. Danielle @ The Pennies We Saved March 21, 2017 at 8:01 am - Reply

    We also keep a hefty emergency fund in the event we are hit with a major expense. In my opinion, having more than $1,000 of an emergency fund is necessary. You just never know what life will throw at ya!

    • Matt @ Lacking Cents March 21, 2017 at 8:16 am - Reply

      Peace of mind is the key, I think. Thanks so much for following and for the comment, Danielle!

  2. financeforgeek March 26, 2017 at 5:12 pm - Reply

    I also find that a 6 months expenses buffer as an emergency fund is a lot. I much prefer 1-2 month, which is something around $5k for my family. In the end it always depends a lot, but having one is definitely a must! I’ve heard so many stories from friends overspending while not having anything set aside for one-time unexpected expenses.

    • Matt @ Lacking Cents March 26, 2017 at 6:32 pm - Reply

      I know some very financially savvy people who don’t bother with an emergency fund at all…they keep a couple hundred dollars on hand and invest the rest. In the long run they are probably better off returns-wise. My method is definitely conservative, but I value the peace of mind more than some extra returns.

      Thanks for reading!

  3. FinancePatriot April 17, 2017 at 10:13 am - Reply

    Ahhh, years ago we kept way too much cash in savings and I regretted it. keep 5k in savings, and put the rest in a taxable brokerage account instead. ETF’s are real easy to buy and sell if you need to, but you’ll find you won’t need to that often.

    Make your money work harder for you.

    • Matt @ Lacking Cents April 17, 2017 at 10:55 am - Reply

      This is one of those topics that varies quite a bit by individual, and I think individuals evolve their own perspective over time as you alluded.

      No doubt that you come out ahead more often than not if you invest rather than put money in a 1% interest savings account. For us it’s about balancing peace of mind as well. But the longer our money just sits in an emergency fund, the more comfortable I think we will be putting more into investments. And you make a good point about the liquidity of ETFs. The money is still available within a few days if/when needed.

      Thanks for the comment.

  4. Lily @ The Frugal Gene May 9, 2017 at 11:49 pm - Reply

    We keep $20,000 on hand as a emergency fund…which looking around seems…like a total waste now. I think the interest rate we get is 0.1%. We do have two mortgages (one house that is 102 years old) but they are rentals and we have no children…hmmm….more things to discuss with the hubby.

    • Matt @ Lacking Cents May 10, 2017 at 6:41 am - Reply

      Sounds like you are on the high side like we are. We opened a savings account with Ally and earn 1% interest on our emergency fund. Not great, but it’s about as good as you can get these days.

      I suspect that as the Fed slowly raises interest rates, savings accounts will eventually follow suit as banks will need new ways to encourage deposits. Until then, we have been investing some long-term money with Betterment and have seen some really nice returns as the market has been strong for the last 15 months or so.

      Thanks for reading, Lily!

  5. Suresh Patel June 20, 2017 at 1:37 am - Reply

    You never know how bad the situations can get which are good right now its always good to keep yourself ready with some backup funds. Thanks for sharing its really very helpful.

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