I think most of us agree that saving money is important, but are we putting our money where our proverbial mouths are? According to a 2015 survey, 35% of American’s had no savings, and 34% had less than $1,000. This means that 69% of Americans are financial fragile. When life starts throwing curve-balls at them, these individuals and families likely will not have the necessary funds to meet the challenge(s). It also begs the question: “Is just one savings fund enough to meet all my life’s financial challenges?”
The answer is not really. If all you have is one savings fund, it is still worth taking pride in. Saving money can be very difficult and any progress you’ve deserves celebration. But don’t stop with one. There are three basic types of savings funds, besides retirement, that dramatically increase a person’s financial resilience: Inconvenience, Emergency, and Job-Loss funds.
1. Inconvenience Fund
I think of this as my “Oh crap!” Fund. As in, “Oh crap, my tire’s flat!” or “Oh crap, my dishwasher broke!”. This fund is for all the inconvenient little problems that pop up randomly. A good amount to have for this savings account is about $250-$1,000, depending on your lifestyle. Personally, I keep about $500.00 in mine. This fund is the smallest of the three and is the one you’ll draw from, and replenish, the most frequently.
2. Emergency Fund
This fund is meant to cover major emergencies that could occur. To determine the proper amount to put aside, you first need to assess what emergencies are most probable in your life.
- Family: Do they live across the country? How much would you need to make the trip if there was a family emergency that you had to travel for?
- Vehicles: This depends largely on the age and make/model of your vehicle. If your car is older, it will eventually need repairs and if it’s of foreign make repairs are likely to be more expensive than for an American model.
- Pets: What emergencies are your pets likely to have? My dog will probably need a $3000 surgery on a tendon in his legs. You can do some googling or talk to your vet to help determine your pets most likely emergency. Pet insurance may be worth considering if your pet has chronic health issues.
- Home Expenses: If you have homeowner’s insurance, that should cover some common issues that arise while owning a home, although it depends on the specifics of your policy. At the least, it is recommended to save enough for your deductible and any expenses that aren’t covered by your policy.
Whatever emergency is going to be most expensive should be the minimum amount you keep in your emergency fund. That amount will cover any less-expensive emergencies which may arise. This fund should have its own savings account to accrue interest, and should be fairly easy to make withdrawals from in the event of an emergency.
Once you’ve funded your Inconvenience Savings, you can begin building your Emergency Savings. Determine how much time you have to fund that account. If you have any extra sources of income, it would benefit you to devote that money to filling this fund. If you have recently paid off a debt, using that payment amount for your emergency fund is recommended. It all depends on your lifestyle and what fits into your budget, but this fund does deserve priority status.
3. Job-Loss Fund
Once you’ve filled the first two accounts, you’re ready to start building the Job-Loss Fund (unless you’re adding small equal amounts to each fund). The Job-Loss Fund requires the most money, and the first step in creating it is knowing what your monthly expenses are. Determine how much you need every month to pay all your bills and feed yourself. Focus only on the essentials and what you need to survive.
To determine your savings goal, take your monthly expense total and multiple it by how many months you want your Job-Loss fund to cover. Six to nine months is a good rule of thumb, but it doesn’t hurt to plan for a longer period of unemployment. Only you can determine an appropriate Job-Loss savings goal.
Your Job-Loss fund also deserves its own savings or investment account. Look for one that will accrue interest and has liquidity, so if/when you need it you can access your money easily.
If you never need to use this fund, it will make a great addition to your retirement fund that you can keep adding to throughout your working life. Building these funds takes time and patience, but they are also worthwhile goals that buy you peace of mind and increase your ability to take life’s curve-balls without breaking a financial sweat.