Emergency fund fully funded, yay!

Photo by Clay Banks on Unsplash

I am getting used to celebrating milestones!

This week, my emergency fund finally crosses over the ‘6 months of living expenses’ line – yay!!!!

I am an impatient person – watching my emergency fund grow ever so slowly has been tortuous, to say the least. 

Believe it or not, I have never had an emergency fund.

I had never even heard of an emergency fund.

Until March 2018. When I heard about it on a podcast and read about it in The Barefoot Investor. When I learned that personal finance experts recommend we all should have an emergency fund with 3 to 6 months of living expenses.

I have always understood the concept of saving for a rainy day but never set aside funds specifically for emergencies. Nor have I ever thought about saving a defined amount.

When I was living with my parents, they were my emergency fund. 

When I bought a house and had a mortgage, my emergency fund was inside the mortgage. As in I was always ahead in my repayments because my weekly salary was deposited directly into my mortgage account. And as long as I was ahead by $2000, I could redraw the excess payments anytime. 

Every time I logged into my mortgage account, I could see how much I could redraw. This in effect was my emergency fund. I got used to seeing this chunk of money as money I could spend. Which was quite dangerous as the money really belonged to the bank, not me. And if they were to change the rules, I would be up sh*t creek.

When I finally got rid of my mortgage, I did feel insecure initially. As I no longer had access to the chunk of money I could redraw any time. So it made sense to save for an emergency fund.

Saving to spend later vs saving money that you cannot use

I am good at saving for the short term, for example for a holiday. And even medium term, as in for a home deposit. That is, I can save for a purpose, to use the saved money to buy something later. 

You see, to me saving is just deferred spending. You save money to use it later, to pay for something – a car, holiday, home, bathroom renovation, retirement. Eventually, that money will be spent, even if it is decades later, in retirement.

Saving for an emergency fund, on the other hand is setting aside money that you are not allowed to use! Unless it is for an emergency. Which you hope will not happen. For just in case something bad happens; for example, if you lose your job or your car dies or you have expensive and unexpected home repairs or God forbid, a medical emergency. 

A holiday is not an emergency. Nor is getting a new dress for the end of year work Christmas party.

My mindset has to change …

 

How much do I need in my emergency fund?

The conventional wisdom is 3 to 6 months of living expenses. 

But at this stage, I have no idea what my expenses are in a year; only that I lived within my means. So I start tracking my expenses. But I start saving anyway – and confirm the final number much later. 

I choose to have 6 months of living expenses for peace of mind mainly. I am fairly confident that I can find another job within 6 months in my field of work. Or I can find casual work as a fill in for after hours or weekend shifts. In other words, I can get by. I hope.

 

Where is my emergency fund stashed?

Peace of mind is central to my way of thinking. It is why I need an emergency fund after all. So I know I don’t need to rely on my credit cards or a personal loan should any untoward circumstances befall me. 

It follows that I want it where it is accessible, not in shares or a term deposit. Whatever bad is happening, I don’t want to have to worry about liquidating shares in a bear market or losing interest if I have to access the term deposit before its term is due.

So my emergency fund is in cash, readily available but in a different bank to my normal every day bank so I am not tempted to spend it all. (Because it is oh so tempting!) 

I know there are 2 schools of thought about this, especially about the opportunity costs.  Even in an online high interest savings account, the interest is falling all the time and may even enter negative territory. (Read A Family On Fire’s excellent article on negative interest rates here.)

I am willing to accept that peace of mind will cost me a higher rate of return on investment but so be it. Sleeping soundly at night is also a priority.

How did I save for my emergency fund?

I pay myself first. 

And automate the transactions.

I decide on how much should go into the emergency fund. And set up weekly recurring transfers from the everyday bank account where my salary is deposited. The amount disappears from my everyday account before I can use it for anything else.

That’s it. 

Simple? Yes. 

Easy? Nope.

 

Why not?

Because soon (two months) after I decide to save for an emergency fund, I discover FIRE (Financial Independence Retire Early). As I am in my late forties, all I can think of is how late I’m starting compared to the 20 somethings and all that missed opportunities with compound interest. I felt such urgency to invest in shares. After all, I have to make up for lost time.

Then there is the retirement account – superannuation. My employer contributes 9.5% of my wages to my superannuation – it is compulsory. But looking at how much I had, there was another panic. I can’t retire well at 65 let alone early! So I start salary sacrificing into superannuation – ie I contribute a pre tax amount. This means my take home pay is reduced.

Now there are so many competing priorities for this reduced take home pay. The emergency fund, the investment fund and have I mentioned the escape fund? ie the travel fund which to date, has been the most important fund. After all that is living expenses. The juggling was … manic.

I start by saving $2000 initially and reduce the weekly amounts while I prioritise the investment fund. Then I switch back to increasing weekly amounts if I feel things are under control on the expenses front. Savings grow at a glacial pace.

In November, I decide to install solar panels. I dip into my emergency fund to pay for it upfront, knowing I will receive a rebate for roughly half the amount from the state government. The rebate arrived in April, some 5 months later! Just as well, nothing untoward happened during this time. 

I was back to not quite zero but substantially less. 

The game changer

Throughout all this agonising about how much to contribute to which fund, I NEVER ever neglected my travel fund. By this stage, my travel fund was double my emergency fund. (Ummm … I had a travel fund long before I had an emergency fund) 

I then did the most adult thing ever! I switch their names. The bigger travel fund is now the emergency fund and vice versa. This is the game changer. It really was the obvious thing to do but it took me many many months before I could bring myself to do it. 

Naming accounts is powerful. All of a sudden, that elusive 6 months of living expenses is achievable and I can see the end is nigh! Did I survive on my holiday with my travel fund so radically reduced? Absolutely. I adjusted. And did not spend all of it. So proud of me!

For the last month or so, I supercharged the weekly deduction just so I can reach the goal quickly.

Final thoughts

It took me 19 months to finally save up 6 months of living expenses in my emergency fund. Most of which was at an excruciatingly slow pace.

But I can sleep soundly at night now, with total peace of mind.

I am very proud I stayed the course and did not give up.

Do you have an emergency fund? I want all the gory details please! How long did it take you to reach your goal? Where do you stash it? Please share below ...

Back to Reality

Oh, the joy of returning home after a five and a half week overseas holiday! Or not 🙂

So it’s now back to reality.

And surprisingly it has been a struggle, even though my new role at work is much less stressful compared to what I did before. I finished up at the stressful site at the end of the financial year, then sauntered off to my longed for holiday.

After spending weeks of only being concerned about where I would spend the day or what meals to eat, it was a rude shock to come back to chores and waking up to go to work.

My biggest shock though?

I no longer had access to a work car!

Let’s backtrack ….

My work car

I have had a work car for the last 26 years, ever since I started work for my present employer. There were a lot of deliveries to clients and we always had a fleet of cars. One of my perks was to take a car home. And over the years, it became a part of my remuneration package.

They were not flash cars – just cars that did the job. Variously, I drove a Toyota Corolla, Camry, Hyundai, and most recently a Honda CRX. That is, until I was involved in a car accident in November which wiped it out. But thankfully I was ok.

Due to the tough economic times of my industry, I did not ask for another car – I just drove one of the other cars in the fleet. My boss agreed to get me a new car in the new financial year ie in July.

But of course since then, I had resigned from my stressful role and negotiated a much less stressful role to start from July; but the car perk was attached to the stressful role.

My boss offered to pay me a bit more to compensate for not having a car but I chose to have a car instead.

Savings from having a work car for 26 years

Not having my own car has saved me thousands of dollars over the years. My ‘back of the envelope’ calculations are as follows –

Car registration – $800 annually x26

Comprehensive insurance – $1000 annually x26

Maintenance – $800 annually x26

Total = $67 000 !!!

That is not including fuel. When I first started working here, I lived with my parents 30km away so fuel costs would have added up. It was only the last 16 years or so that I lived 15 minutes away from work.

Upon my return from holidays …

I discovered that I could not use one of the other cars in the fleet from the other workplace. As technically I am no longer employed on that site. And my new car was not ready.

But luckily my boss was negotiating a better finance deal with the car dealer and that had delayed the whole process. So I was still getting a car, just not right now.

During those ten days, I relied on my colleague to drive me to and from work. And on the weekend, I borrowed a car. I live in the suburbs where public transport is just not readily available. A 15 minute car commute to work would take an hour by bus and train.

All this brought home the fact that over the years, I have taken for granted the availability of a work car. Transport has not been a line item in my expenses for the last 26 years. I am incredibly fortunate.

It was a good reminder that it is not a God given right and that really, it can be taken away just as quickly.

My new work car

Emergency Fund

But the biggest reason why I fought hard to have a work car is that I cannot cash flow a car right now without touching my emergency fund. Which I am so loathed to do. It is taking me so long to build this up that I really do not want to touch it. Unless maybe a life and death issue? I am so close to my goal of having 6 months’ expenses saved.

And I most certainly do not want to borrow money to buy a car. I so enjoy being debt free ever since I finished paying off my mortgage. That feeling of freedom … I just cannot stomach being in debt again.

I know in the FI community, the prevailing advice is to buy a second hand car. But I want a car that will last me till the end (maybe the next 20 years?) and that I can drive around Australia on road trips. That is a dream for when I retire; when maybe I no longer feel the need to travel overseas. And when I have time – Australia is rather big.

So an old bomb is out of the question – I don’t want to break down in the middle of the Outback.

In saying that, I also don’t want an expensive European car with all the mod cons. Can you tell I am not a car person at all? I don’t know enough car lingo. I just want a reliable car that is not going to break down every 5 minutes.

So, I am open to buying a 2 to 3 year old car but I guess with my inexperience, I am worried that I may pick a ‘lemon’. My estimate is I may need $15000 to $20000 for a decent car.

Final thoughts

Ever since I discovered FIRE, it has been at the back of my mind that I need to save up for my own car; for the eventual time when I retire and no longer have access to a work car.

This episode just highlighted the urgency. It made me very aware that I really must start saving for a car as soon as possible. Though I must confess that my secret strategy is to buy my current car from my employer when I eventually retire 🙂

Do you enjoy a current perk at work that you will miss when you retire? How will you cope with the loss?

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