Emergency Fund(s)

We started last year (2011) without a clue what an emergency fund was or what it was good for.  We ended last year with a "fully funded" emergency fund.  How?  Why?  Who?  What?

Exactly.  We followed the Dave Ramsey plan and first moved $1000 into our joint savings account.  That is our "baby" emergency fund.  And, truth be told, it was our baby emergency fund before we knew what that was.  Our next step in this process was to pare our budget down to the essentials and save everything we could.  That money we "piled up" in our Credit Union Money Market account.  With extra money from a longevity pay bonus, side work, and gifts, we managed to save enough to cover almost 6 months of "bare minimum" monthly expenses.

Six months is a good guide to cover a lot of life's hidden challenges.  The fund is set to cover:

1. Mortgage Payments (the minimum without any added principle)
2. Utilities (cell phone, electricity, internet, and water for about $260 per month)
3. Food (we'd cut back but will be approximately $400 per month)
4. Health insurance (in case something bad happens)
5. Misc (gas - a relatively minor expense for us, etc)

That's about it.  If I were to lose my job, we'd immediately stop contributions to charities, retirement, Christmas savings, the HSA.  Basically, if we didn't HAVE to do it to keep the house running while I found something new, it would be cut.  I'd also really try hard to pick up some more side work.  

The other thing we've been doing for the last year is saving up in our "sinking fund" envelopes.  (More on our envelopes to come in a later post.)  We have sinking funds for:

• Clothing
• Car maintenance
• Vehicle taxes, insurance and AAA
• Home maintenance
• Pre-school (we continue to save during the summer to cover higher costs the following year)
• Gifts (not including Christmas, for which we save in our Credit Union's Christmas Cash Fund)
• Races (a now minor expense for us)
• Travel and Recreation
• Subscriptions

With these "funds", we've managed to capture all of our annual expenses, as we've been through a full yearly cycle.  These funds also serve the back-up purpose of a further emergency fund.  We store most of these in a money market account and track it with an excel spreadsheet.  We store the rest of it at home in case we need cash (since neither of us have a credit card, and we prefer cash to using our debit card.)  

This plan has worked well for us over the past year and I don't think we've made any major changes since inception.  The amount we regularly contribute has fluctuated based on need/availability of extra cash, but we continue to make good progress.