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.
Some thoughts
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.
amber tree leaves 
At the moment we have an emergency fund and besides that I’m saving to replace my car and we’re saving for travelling. The rest is used to kill our debt.
My savingsrate is just income minus expenses. When I replace my car I’ll just have a bad savings rate that month. It’ll smooth out over a year. We don’t want to micromanage.
LikeLike
I follow you on the micro manage. I have found a good equilibrium between detail and valuable info. I have no idea how much I spend on groceries vs hygienic as it is all in one category. Our personal fun money is one big category as well.
LikeLike
I never thought about counting your emergency savings as an expense, but I can see how that can make sense.
I have heard of some people investing their emergency savings, but that’s definitely not the right plan for me (market hater!). I’m in the same boat as you with having cash on hand if needed. We keep ours in an online savings account that pays a better interest rate because, right now banks here in the U.S. are giving you maybe 0.01%. The online savings at least gives us 1% – it won’t keep up with inflation, but it is what it is.
— Jim
LikeLike
Interest rates in Belgium are not any better. We have a legal minimum – for now of 0,11 pct. Online banks reach around 0,8 – 1,0 pct
LikeLike
We have an account called Long Term Savings for Spending. It’s not an emergency fund, rather it’s an account that we put aside money each month for future expenses like vacations and etc.
LikeLike
The name of your account is exactly what this post is about. in your net worth and saving rate, do you count it as a an expense?
LikeLike
I wonder the same thing. I include holidays in that category too. We have a redraw facility on our home loan and I park the money in there (so it offsets against the loan interest @ 4%) but in my budget it is a separate line item so it doesn’t count towards debt repayment. So then at least it is not parked in cash @ 2% but no risk either.
LikeLike
Sounds complicated 😉
I remember an research article about having an “emergency fund”, and it boiled down to the point that in reality for the large majority of people, it is best to pretty much not have one in cash. Just use your investments as the “emergency fund”. Historically, that would have been the best way to allocate your money since “real” emergencies rarely happen.
Now, some cash is required obviously, and we also like some peace of mind. So in our approach we (try to) hold about the equivalent of 6 months in living expenses in cash. This cash pile is for everything (“emergency”, holidays, other larger upcoming expenses, etc.). Everything else is slated to be invested. If a real emergency occurs (and we struggle to see what that could entail), the investments are always there in some form.
Did require a bit of an attitude change to get to this point.
LikeLike
I do see your point to create one big pot of investments. The attitude change that you mention is an important one. We are not yet ready for that.
As for the complexity: due to automation, it is fairly easy. One account for savings and one account for investments…
LikeLike
Hey ATL,
Thanks for your topic. We are still building our wealth/investments/cash so we aren’t in the full position we’d like to be, particularly with IVF coming up. This is how roughly deal with our cash:
Transacation account has 1 month’s expenses (and my wage is paid into this account so it constantly refills)
Long term goal savings account, we contribute monthly to this (and that is an ‘expense’ in our budget). We use this account to save for IVF and after IVF, will be our house fund.
Savings account (emergency fund) has a minimum of 3 month’s expenses in it, we regularly contribute to this if our transaction account has more than a month & a half expenses in it. The balance above 3 months expenses will be for future investments / other large life purchases (that don’t form part of our yearly budget).
Hope that makes sense 🙂
Tristan
LikeLike
Looks similar like our approach. Good to see it confirmed.
LikeLiked by 1 person
A second small “emergency” pile of money can have its benefits too. I would more see it as ‘cash on the side’ for opportunities. Opportunities like holidays, improving home/garden or what I would add stock market opportunities. I know many people say timing the markets can’t be done, and mostly I think they’re right. However, if you keep investing on a frequential basis and have some spare cash for when things go down, that’s your advantage. Then you could buy more with the spare cash when stocks are on sale. Markets can’t be timed, ok, but let’s have a look at the past year. In general there would have been 2 big opportunities: Black Monday in August and the February dip. That’s once in 6 months.
LikeLike
That is more or less the way I look at that cash. thx for sharing
LikeLike
Hi ambertreeleaves,
Your approach of separating long-term savings and your emergency fund makes sense to me. The first is intended to be spent, the second isn’t. I’ve even seen some people exclude their Savings from their net worth calculation because it’s money expected to be spent but I personally don’t do this.
I don’t treat either Savings or Emergency Fund as expenses though. I follow a pay-yourself-first approach so the money I’ve allocated to those purposes is removed from my paycheck first, and then I deposit a fixed monthly amount into another bank account I use for paying monthly living expenses. Any remaining money is then invested into my Income Fund.
So Savings contributions show up as a percentage of my “income”, as does “living expenses”. But savings and EF contributions don’t show up as a percentage of my “living expenses” since they’re excluded.
My “living expenses” bank account has a 3-month buffer of living expenses which is partly why I am ok with being more aggressive by investing my Emergency Fund.
Best wishes,
-DL
LikeLike
In my amberindex, the emergency fund and long term savings are excluded. So is our main house. The amber index holds only assets that supposedly produce an income, either via payouts or via selling some of them
LikeLike
This seems like a good approach if you’ve already got a decent emergency fund for the really important stuff!
LikeLike
Hey Jenna, thx for the support. Our emergency fund is more or less where we want it. Combined with the mid term fund, we feel safe enough.
LikeLike
I like the idea of medium term savings fund. we call ours as discretionary fund. What really works for my family is just to combine both medium term and emergency funds. This way they’re all in the same account and it’s easy for us to track.
Basically, we know how much is really for emergency fund (roughly 1 year of saved money) and any addition to that amount is for discretionary funds. Our emergency fund is a set amount. So, we know how much is the discretionary fund even when combined with the emergency fund.
LikeLike
I’m the same way, I can’t imagine spending my “emergency fund”. I keep it mine in my checking account though. So in case I accidently overdraw on something, my emergency fund can act as a buffer and avoid any overdraft fees. I haven’t ever dipped into it, but it’s comforting knowing that it’s there to protect me against a crazy emergency or evil overdraft fee. =)
LikeLike
I am so for emergency funds. I think using debt or drowning from your investments to fund an emergency fund can lead to some serious financial problems in the future. I have not only experienced this first hand, but I know people whose lives have been temporarily turned up side down from not having a fully funded emergency fund. My husband and I keep one and it has help us out lots.
LikeLike
That is why we love our emergency fund so much. It creates a great piece of mind
LikeLiked by 1 person
Hi ATL, I like your approach! It would be too easy to co-mingle savings for replacement goods (laptop, fridge etc) or services (gym membership, travel) with an emergency fund, but as you say these aren’t genuine emergencies. I think it’s important to save for such items seperate to an emergency fund.
LikeLike