This week we’ve had both good and bad news. After our car accident, it’s quite possible that we may have to dip into our emergency fund. While I’m not happy to be using it, I’m very glad that it’s there for us.
All of this got me to thinking about the slight difference (in my mind at least) between a regular savings account and an emergency fund. When do you use your emergency fund, and when should you have a specific savings fund? I’ll share my thoughts below based on recent events. Hopefully you’ll have some advice as well on how to use your emergency fund without going broke.
Total loss on the car
This car accident is proving to be more and more of a headache, as USAA declared our beloved Acura Integra. That means USAA will pay us a fair amount for our car and will then junk it because the repairs cost more than the car is worth. While I’m happy that we’re getting a check to put toward a new car, we now have to deal with the hassle of buying a car.
Between the check we’re supposed to get and the money have stashed away in our car replacement fund, we’re hoping to find something reliable. If not, we’re prepared to dip into our emergency fund.
Avoiding car payments
We’re going to do our best to pay cash for our next car. As you saw with my tips on buying a car, that means we have to go through the process of finding the right one for us.
- Determine our budget. Right now we’re looking at the money from USAA and the money saved in our car replacement fund. If necessary, we’ll take up to an additional $1,000 from our emergency fund.
- Decide on our must haves. Reliability and gas mileage are the two big factors. My husband would prefer a two-door coupe with manual transmission, but he’s keeping his eyes open for a good deal.
- Decide on new or used vehicle. With our budget, it’s a given that this will be a used car. As long as everything checks out mechanically, having a used car is not an issue.
I’m digging through Edmunds and Consumer Reports to get ideas on what we need to avoid and which car may give us the best bang for our buck.
We’re happy that we paid off our car loan and we don’t intend to have car payments again. They’re just such a big monthly expense that we’d like to avoid having a car loan if at all possible.
Emergency fund or savings?
Buying another car was part of our financial plan – eventually. We knew that one of cars would eventually going to break down, and that it would be smarter to get a reliable replacement.
The emergency for us now is having to buy that replacement car much sooner than we planned. As you can see, all of our well thought out plans we had went out the door when this came up. So while we don’t have nearly enough to buy a car in our ING subaccount, we’re happy to have something set aside.
Ultimately, my recommendation is to build up your emergency fund before you start saving for specific goals. If an unforeseen expense, such as a car accident, leaky roof, etc. crops up before you have enough saved in a dedicated account, then you’ll have to dip into that emergency fund. If not, then spend from other sources of money and keep that emergency fund in tact.
So just how much should you have stashed away in your emergency fund? Most experts generally recommend 3-6 months expenses, but I think a better rule of thumb is enough to allow you to sleep well at night. The fewer responsibilities you have, the less you’re likely to need. In other words, a couple with kids probably needs much more than a college student.
Once you have a fully funded emergency fund, start redirecting those deposits into a car replacement fund, an account for a house down payment, etc. You’ll be amazed at how quickly those focused deposits accumulate, and hopefully you’ll have a decent cushion when the unexpected happens to you.
Have you ever had to dip into your emergency fund?