Before we started our personal finance journey in 2015, it seemed that everything was an emergency.
Overspent in a category of our “budget?” Take it out of savings.
Car breaks down in an actual emergency? Take it out of savings.
We didn’t differentiate. We didn’t analyze. We just spent like the spendy spenders we were, which led to us consistently draining our savings account. Whether we saved $500 or $1,500, you can bet it was gone in a few months.
In retrospect, we probably spent because we lacked goals. Sure, we imagined that we would be doing something other than working W-2 jobs at some point in our lives, but we didn’t put pen to paper to outline any specific goals.
“If you don’t know where you are going, any road will get you there.” – Lewis Carroll
We lived for years without goals. We were somewhat happy, moving about in our day-to-day lives, doing things that our peers were doing…working…renovating…eating out…spending…
But it got old. It would have been nice to say it got old after six months, but it was much closer to six years. Six years before we took a hard look at everything we had to be thankful for to realize that we’re wasting out time, money, and talent. It’s a big world out there, lots of good to do.
Thus, we set a lofty goal in spring 2015: to be financially independent by May 18, 2019. For us, to be financially independent by that date means we have all of the following accomplished:
- completely, 100% free of debt;
- an emergency fund that covers one year’s worth of expenses, about $25,000; and
- income from REI that covers our household budget.
Now, THIS is a specific goal. Ha!
We’ve been making progress on our debt. As of today, we’re down to $10,679.54 in debt, so we project we’ll be debt free by the end of March.
UPDATE: We’re completely debt free, including our mortgage!
What’s on the docket after the debt? Saving our emergency fund.
For two years, I’ve read countless blog posts on the subject of emergency funds. I just couldn’t find the right solution to counter our behavioral problem. There are PLENTY of articles about savings accounts, but not enough about savings behaviors.
Some say that paying off debt is like saving money, so if we shift our debt-crushing behavior into another category, we should be OK.
However, our attempts to save money in an “emergency fund,” i.e. the savings account at our local bank, have failed. We’ve failed to save an emergency fund throughout this journey to debt freedom, so we’ve not been saving an e-fund.
Bad, bad personal finance bloggers. *finger wag*
Yeah, we know that saving for emergencies is important.
Yeah, we know that we are taking an enormous risk by focusing on our debt rather than saving money first.
We are two months from debt freedom, so we’re going to go ahead and roll the dice again. We’ll wait to start saving for our emergency fund in April when we’re debt free.
You might think it’ll be easy to save the money given the rate at which we paid off our debt, and you might be right, but with our track record, we decided to come up with a new system for managing our emergency fund.
First, we stopped leaving our emergency fund in the personal savings account at our local bank. What a mistake this was for us! With a simple transfer via our online account, we could move money from our savings to our checking account, and we certainly took advantage of that accessibility.
Instead, we started using the personal savings account as an “escrow” account. Since we no longer have a mortgage, we have to save for taxes and insurance; we have the $1,800 saved we need for both. Each month, we have an automated transfer from checking to savings of $175. Knowing this personal savings account is our “escrow” account has been a game-changer. Seriously. All we did was give this account a name and we haven’t touched the money since.
Second, we decided we’d create new budgets every month to track every dollar, a process we started this month. We’re taking some advice we received last week about our budget and making some tweaks because every dollar really does matter; we can’t be lax on budget categories because of perceived needs. Currently, we have a category in our budget for “student loan repayment,” but we’re changing that category to “emergency fund” in April. This is new for us. We never budgeted savings; instead, we would just move a few bucks from checking to savings at the end of the month. Not anymore. We’re setting savings goals.
Third, we opened an account with an online savings bank where we will store our emergency fund. Ally is one of those online or branchless banks that exist in a way I don’t think I’ll ever understand, but I don’t really need to. After considering all of the options suggested via Twitter, Ally seemed like a solid choice.
Here’s the deal. If our emergency fund is easy to access, it’ll be easy to use. If it’s difficult to access, we don’t bother. If we need a few extra bucks, we need to buckle down on the frugality front. In the event of a true emergency, like medical and auto, it’s not like it’s the end of the world that we have to wait a couple of days for Ally to transfer the money back to our personal checking account. Ally makes it just irritating enough to withdraw the money but not so difficult that we have to wait a week for the cash. And irritating is what we need. Irritating is what fosters behavior change.
Related: 3 Tips for Emergency Fund Savings
Fourth, we’re going to make weekly transfers from our checking account to our Ally account during our budget meetings until we have $25,000 saved. We could automate our savings, but this hasn’t worked either. A couple that saves together, stays together.
Whoa, back up. Don’t personal finances experts recommend three to six months for an emergency fund?
True. Since we are not personal finance experts, I wouldn’t question that logic and I’m sure it works for many people. But in the event that something catastrophic happens, like an accident, illness, or a job loss, we wanted a little extra cushion to keep us afloat. This is why I started calling the emergency fund our emergency/avenge death fund.
If something were to happen to me, for example, I wouldn’t want Garrett to feel the need to rush back to work. Three months’ worth of expenses is not enough to cover funeral costs, so he’d have a few days off before he’d have to return to work. How’s that enough time to grieve? In the event of my demise, I want Garrett to be able to quit his job and fulfill the plans we set to travel the world and avenge my death, of course.
Saving a full year’s worth of expenses means that after funeral costs, he’d have a few months of travel before he’d have to decide what he wants to do with the rest of his life, assuming he hasn’t already decided to be Batman. Morbid? Yeah, but it’s the reality. Life is short. Sometimes shorter than we know. No amount of money could replace a loved one, but I take comfort in knowing that this emergency/avenge death fund will make life a little easier for the living spouse.
Related Post: Get a will.