The Non-Emergency “Emergency” Fund
Posted on September 15, 2007 by Melissa
Filed Under Debt, Savings
I’ve Paid For This Twice Already’s article on giving yourself a payday advance is a very good concept. It’s easy to see why payday loans have such an allure for those strapped for cash. For people living paycheck to paycheck tapping their emergency savings to help them get through the tighter periods can be very helpful. It acts as a “payday loan” without paying the high fees typically associated with those short term loans. I am all for avoiding payday loans.
However, I think using your emergency fund for these types of short term loans can start to erode the meaning of that fund. Ideally that fund is for emergencies. For me, that means serious (and hopefully rare) problems like unemployment, car repairs, huge medical bills, and critical home repairs. We want this fund out of our immediate reach in a high interest savings account. It needs to feel untouchable. I fear that if we got used to withdrawing from it for small, non-emergency things it could create a “slippery slope” that blurs the boundaries. It loses it’s distinction as the almighty emergency fund and becomes yet another savings account for me to use at my discretion.
Although running short on money before the next paycheck can feel like an emergency, technically it is simply going over budget for that time period. Instead of pulling money from our emergency fund, we’ve found that it’s better for us to keep a fund specifically for “everyday” shortages and frequent transactions. We call this the overage fund.
Let’s say you find a spectacular sale on paper towels and you stock up, spending more than you have set aside for the household that month. Maybe it’s time to get your oil changed but fuel costs ate up the car budget. Or perhaps the first part of the month has a higher proportion of the bills and you have unexpected expenses that result in that paycheck running short. Are these really emergencies? In most cases, probably not. But they could put you in a situation where you could be in a real pinch or even go into debt. These would be cases to use an overage fund.
Our overage fund is a couple hundred dollars and we keep it in our normal checking account as a cushion. Basically it’s a small amount of savings that we dip into whenever we have to and replace as soon as possible.
We use the overage fund for two main reasons:
- As a temporary loan while waiting for the next paycheck
- To avoid interest accruing debt when we go over budget for the month
Temporarily using money from the overage fund can help you make it to the next paycheck without going into panic mode. Mostly we use ours to help us avoid debt by using it to supplement months where we go over budget. We can pay the extra expenses from our overage account without having to keep a credit card balance. This saves us on potential interest charges. In the upcoming months we make sure to pay back the amount we took by reducing our budget accordingly.
An overage fund can be in any form you feel comfortable with. Maybe this fund is just the cushion you keep in your checking account. Maybe it’s a savings account from which you can easily transfer funds. It just needs to stay close to home so you don’t have to wait for the funds to transfer if you need them quickly.
Always aim to keep a certain level in this fund. It could be something like $200. If you go below that amount work to stay under budget in order to replenish it. If you are using it as a floater until the next payday be sure to replace the funds immediately when you get paid next. If you have to tap these funds due to unexpected bills pushing you over budget it should be a priority to pay them back, just like other debt payments. Only this time you’re paying yourself back and not the bank.
Whether you are pulling cash from your official emergency fund or an overage fund you are using your own cash instead of relying on a payday loan or credit card. It’s a very positive thing that can help keep you from paying fees and interest. Using this method, we’ve been able to stock on some sales, go out to an unexpected dinner with friends, and manage to pay for our car registration (which we had completely forgotten about) without having to dip into our emergency fund or leave a balance on our credit card. Within a month or two we’ve usually managed to reduce our spending enough to replenish our overage account so we’re ready for the next unexpected expense.
Image Source: StuSeeger
If you're new here, you may want to subscribe to our RSS feed, get the posts via email, read more about the blog in our about page, or browse our archives. Thanks for visiting!
Comments
6 Responses to “The Non-Emergency “Emergency” Fund”
Leave a Reply
Subscribe!
 |
 |
 |
 |
 |
|
 |
About Us
A Penny Closer is for those of us who want to improve how we spend, save, and invest. We want to be able to manage our money so that we can use it to enjoy our lives today while still saving to reach our dreams tomorrow. Read more about us here...
Top Commentators
Suggested Reading
Tis a good idea.
And thanks for mentioning me!
I wasn’t endorsing borrowing from my emergency fund though, I was expressing another reason that my emergency fund makes me feel safe(r). In fact, I didn’t borrow from it.
I can’t have too many funds with different labels or it just takes away from the amount I can snowflake to debt. But I think it is a very good idea for those who want to. I’m on an interest-avoidance deadline.
Nice post :)
PaidTwice - Thanks for the comment!
We’ve been tempted far too many times by the emergency fund ourselves and found that we had to have this extra little bit, even though it earns squat for interest, so that we could avoid the temptation to tap our emergency resources.
To keep down on the management headaches, we keep it a consistent, small amount that is kept directly in our checking account.
I really enjoyed your post, and it really spoke to me and the situations I’ve been in. I just wanted to share what I’ve done to avoid this temptation myself.
PS - Did you get payday loan spam to your blog after you wrote that? I got one in within minutes of my posting this entry. Crazy!
Ah yes, the payday loan spam :)
I found I got the most spam though after I wrote a post in which the words “personal finance” were in the first sentence. Not only spam, about 10 partial scraper sites ripped off parts of my post. Oh joy. :)
[...] presents The Non-Emergency “Emergency” Fund posted at A Penny Closer. We view our emergency fund as a resource only available to us in the most [...]
Is that a new way? Would you like more of my adaptable monarch A joke for you! What magazine do cats like to read? Good Mousekeeping.
We have been following Dave Ramsey’s “Financial Peace University” since April, and have made major changes to our spending habits. One of the first things that Dave advocates is setting up an emergency fund of $1000 (if your income is $20,000 or more; $500 if your income is less than $20K). He also advocates working on a “debt snowball,” where you pay off your smaller debts first, and once paid off, add the money you WOULD have used to pay off the next higher debts, and so on until all of your debts are paid off. Once all of your debts are paid off, sock that money away for retirement, etc.
Financial Peace University is generally offered through churches (it’s a faith-based program); we paid $99 for our family (our daughter is 23 y.o.), and have already recouped that money & then some.
We used to use our credit card for all expenses; now, with Dave Ramsey’s recommendation, my husband withdraws money at the beginning of each month, divides it up among several categories (listed on individual envelopes): groceries; Target (cleaning supplies, cosmetics, etc.); dining out; clothing (including shoes); miscellaneous (my hair appointments); etc. It’s not easy to stick to the budget, but it’s getting easier with practice. And our grocery bill is way down: we’re planning our meals for the week & buying only what we need for the week, relying on left-overs for one meal; plus we’re relying more on store brand items, rather than brand names.