Having an emergency fund is one of the must haves before you start to invest. I feel lucky, we do have an emergency fund. However, there are many small to medium size expenses that you plan for and thus, I do not consider these an emergency. How to save for those?
Some samples of such expenses are a new laptop, discretionary expenses while on holiday, a last minute family weekend away, garden new lights…. There are many more.
While other people take the money for this out of the emergency fund, I have a mental problem doing this: These are not emergencies. This is why I put aside each month a certain amount on our savings account. In the savings rate and amberindex, I count this as an expense.
When we then decide to spend money on such an item, I do not feel guilty. The money comes out of this medium term savings fund. Not the emergency fund. It makes it easier for us to decide on these expenses as the money is available.
Are we right to count this as an expense?
I think this is the right way to do. We do not plan to invest this money in the short term. We are likely to spend it.
In the odd case that we build up too much cash, i will convert this cash into investments. At that time, I will increase our income and savings of that month. I believe this is the right thing to do
Is it ok to keep this in cash?
Keeping cash is loosing buying power with the current interest rates. Inflation is higher… Still, this money needs to be available on the fly, no strings attached.
To us, this seems to be the best approach. I just need to make sure the cash pile does not get too big.
Are we not creating a double emergency fund?
Probably we are… It means are real emergency fund is bigger than we think. This is good.
The alternative: invest the money and get a higher return
This is one thought that I have. It could increase big time our fund, but also reduce it unexpectedly. As we have a lot of vague plans in our head that become real soon, it would be a shame to postpone these because of Mr. Market. Looking back at the past few years, the amounts in this fund do not get excessive high and are used quite frequently to improve our home/garden/go on a family holiday.
One of the reasons I really love this approach is the simplicity. It takes some of the planning out of the daily life:no need to save a few months for this or that. The big caveat is not to use it thoughtless. Before buying, you need to ask yourself if it is really needed. For now, we manage to do this.
What are your thoughts on this approach? How do you deal with an emergency fund vs small expenses you plan ahead of time.