Last week I told my readers that my wife and I prepare for unexpected expenses by creating mini-emergency funds targeted at those potential expenses.
Unplanned expenses are a fact of life. As with anything you can choose to close your eyes and cross your fingers in hopes that they won’t happen to you, or you can prepare for them. We choose to prepare for the things we identify as potential upcoming expenses. I’m talking about things like car maintenance (flat tires, parts fail) and home maintenance (air conditioner or heater goes out, water heater quits, dishwasher dies).
These things are inevitable over time. So why not prepare today?
Do You Have One General Emergency Fund?
I’m sure if you’ve been reading Cash Money Life for long, you have followed Ryan’s advice and have a general emergency fund. Maybe you’ve earned a gold star and have funded that account with 6 months of living expenses.
But have you defined what the emergency fund is for?
In my eyes when you say your emergency fund has 6 months worth of living expenses in it then that isn’t just an emergency fund. That’s an unemployment fund. You’ve tied the total in the account to a purpose — living off of it without any income. That sure sounds like unemployment to me.
Now just take that idea and apply it to other areas of your life.
Many Funds for Many Purposes
Two weeks ago my wife ran over a screw in the road and was rewarded with a flat tire. Thankfully we had set aside money specifically for car problems. You might say we had a car maintenance emergency fund.
If our clothes washer died today we have a small pile of money sitting aside just for home maintenance. We tap that money for any home related emergencies we have.
Just take this idea and expand it to fit your individual situation. You may need an unemployment fund, car and home maintenance funds, and a “the kids are bound to get sick” fund.
Use Sub Accounts to Track Your Savings
How can you track all of your emergency funds targeting specific types of emergencies?
- track everything within one large savings account and break out the individual funds on paper or on a spreadsheet
- have separate bank accounts for each fund
Option 1 can get pretty complicated and you have to be really good at keeping things separate. At the end of the day if all the money is in one big account you have to mentally say “Okay, of that money only this much is for this emergency.” It can be real easy to dip too far and too often into the account.
Option 2 is clearly superior. By keeping the money in separate accounts you drastically reduce your chances that you will dip into one of the other accounts to pay for this account’s emergency. For example if you have $500 in the car maintenance fund and $500 in the home maintenance fund and you have a $300 car emergency, that money needs to come from the car money. Because the next thing you know you’ll have a $500 home repair!
Some banks have a feature which allows you to create sub-accounts within your main account, so you can earmark funds for a specific purpose, while keeping all the money part of one larger account. Capital One 360 makes this incredibly simple to do. You can open up a bunch of accounts within your one main login. All you do is click “Open an Account” and give it a name like “Car Maintenance,” “Home Repair,” or something similar. Here is a detailed tutorial with screenshots. Ally Bank is another bank that has similar features.
These sub-accounts can also be really handy in saving for goals, too. Again you are trying to keep the goal money away from your other costs and away from your ability to easily spend it.