Do You Really Need an Emergency Fund?

What Exactly Is an Emergency Fund?

Almost universal across all personal finance advice is to build up an emergency fund so you don’t get derailed by unexpected expenses. But what that means can take on different forms. Some say to save up $1000 to guard against unexpected expenses like car repairs, while others advise saving 3-6 months of income to prepare for something more serious like an illness or job loss.

As a long-time user of YNAB and an adherent of the first rule: “give every dollar a job” I’m kind of surprised by the sudden ah-ha moment I got while reading Jesse’s new book, You Need A Budget.

Unpredictable but Inevitable

What dawned on me (and ended up actually being spelled out in Ch.3) was there really are no unexpected expenses. We just need better planning for the inevitable.

Car repairs? I have a category for that. Medical expenses? Check. New car savings? Working that as well.

I’ve been struggling with scarcity since hitting refresh on my budget, but I think part of that might be because I put a big chunk into an “Emergency Fund” Category.

My ah-ha moment clarified that that is kind of cheating. Instead of actually prioritizing for the unpredictable but inevitable expenses I’m throwing money into a catch-all category – one that could be easily raided for any overspending.

What Constitutes a True Emergency?

If we set up a generic emergency fund, how do we decide when to raid it? Can we tap into it for anything that will keep us out of debt? That would only serve to enable our overspending.

Is it only for the big expenses we just didn’t budget for like car repairs? I drive an 8 yr old Ford Escape. Let’s be honest, repairs are an inevitable expense at this point, we just don’t know when they’ll be needed.

I’m thinking we’ll be better served actually breaking those “emergency” dollars out into the categories they’d most likely be needed for. Plus, maybe I’ll be less likely to raid the specific savings categories versus a general “emergency” one.

Abandoning the Emergency Fund

So my weekend task is to re-allocate those “emergency” dollars into categories that might represent those actual expenses.

What’s your take on an emergency fund? If you don’t have a budget, I’d definitely recommend one, but if you are budgeting, are you cheating yourself and setting yourself up for failure if you don’t pre-define what an emergency might be?

Let me know what you think in the comments.