If there’s one thing pretty much as certain as death and taxes, it’s that anything made by human beings will eventually break down. And it always seems to happen at a bad time or, worse, several things happen at about the same time.
For instance, last year some close friends of ours endured a cracked foundation (and resulting water damage to a finished basement), a collapsed main sewer line, and a bad transmission in one of their vehicles – all within two months’ time. The combined total for repairs? Almost $15,000! Who has that kind of money lying around? We all should, really. It may seem unattainable to some of you, but it can be a reality, and slow and steady wins this race.
You’ve heard me talk about the importance of having an emergency fund. Next to paying your bills on time, it’s the smartest thing you can do for yourself financially. But there are different ways to go about it. I prefer to itemize and separate according to purpose, rather than just build a single fund for all emergencies. I’ll tell you why.
First of all, if you don’t yet have an emergency fund, start one today (http://frugalliving.about.com/od/moneymanagement/ht/Emergency_Fund.htm). Or first thing tomorrow. With any amount, in a coffee can or a cash-equivalent savings account, begin saving now. Now that we have that established, let me explain why I think it’s better to have several smaller “emergency” funds instead of a single, general one.
Long ago, my husband and I bought into the annual inspection and maintenance deal for our furnace and air conditioner (http://www.foxbusiness.com/personal-finance/2012/11/15/does-your-furnace-really-need-yearly-inspection/). Routine maintenance can feel like throwing money at something that isn’t broken, but it is usually worth every penny, whether for your home or car. This needs to be in your budget every month, even though you hopefully won’t use it every month.
Since then, our furnace developed a dangerous crack in the burner and needed replacing. The money we’d set aside for maintenance helped us quickly buy a new unit, without throwing it on a credit card.
Another quick thing to consider, while on the topic, if you are looking to buy a new home, bring in an expert to check out your furnace and AC. The building inspectors don’t look in-depth at these. Yes, it might cost a bit more now, but could save you boatloads down the road.
We also have separate emergency funds for our cars and our house. We have a separate account for repairs, and each one gets the same regular monthly deposit. This has gradually increased with our incomes over the years.
What about home improvement, like replacing your windows or roof or replacing a washer or dryer than repair it? These may not always qualify as “emergencies,” but they’re definitely unplanned expenditures that can put you in debt.
The only way to avoid it is to plan for them, but these funds should be separate from something you need the ability to tap right away. As a rule, the harder it is to remove money from an account, the higher the interest/dividends you earn while your money sits there.
For this reason, I like to keep true emergency funds – such as those saved for a job loss or serious medical bills – in a higher interest-bearing account, like a money market or certificate of deposit (CD) (https://www.cacu.com/high-interest-savings). The repairs/maintenance fund is in a simple savings account; the interest is lower, but the funds are more accessible. The home improvement account is somewhere in between.
Any emergency fund is a great thing to have. If you’re lucky, it can build up over time without a significant hit and you’ll be staring at a growing balance month after month. If you’re like the rest of us, you’ll need to tap it at one point or another. By separating funds for the routine versus the once in a while, your hard-earned savings will work harder for you – and cover more of the inevitable unexpected.
Kat's Money Corner is posted on Dollars & Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her little one, is a manager with CommunityAmerica Credit Union. For more financial chatter, click http://twitter.com/savinmavens.