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Author: LaughingRaven Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308882  
Subject: Re: E-fund disasters: what's yours? Date: 7/30/2007 5:18 PM
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I would agree that this isn't really a controversial topic. Most of us would agree that everybody should have an emergency fund; the discussion usually revolves around finer points, such as "how much should I save before investing?" or "what constitutes an emergency?" or "where should I keep my e-fund?" Those are user-specific, so it's a more interesting discussion.

Fuskie said:
I think the problem here is one on which I frequently harp. An eFund is not the same thing as a household fund. An eFund is an insurance policy in case you lose your income. An hFund is money, $1000 is good, set aside for routine and unexpected household expenses, automotive repairs and such. It is kind of like a petty cash fund, where you have to account for what you use and reimburse the fund as soon as possible.

Ditto. Although I'm still paying down credit card debt, I keep three "special funds":
1) a $1,000 e-fund (seemed like a nice round number) to cover a short-term loss of income. This will increase to 3-6 months' expenses once I've paid off the cards.
2) a household fund, to pay for occasional maintenance. For instance, we're* shopping for a new sofa; the futon that saw me through college has gradually decayed into an ergonomic nightmare. That money will come out of the household fund. I've heard that homeowners spend, on average, 1% of the house's value each year on maintenance. I'm not sure whether "maintenance" includes new furniture or improvement projects, but it seems like a good starting point.
3) an "expenses that occur every few months" fund. For instance, I have to pay professional dues every year, and vehicle registration fees every two years. I break those down into a monthly amount, round up to the next $10, and segregate that from our other funds. If we paid our auto insurance or gym membership in a lump sum, we'd save the money for next year's payment in this account as well.

An important distinction here is that I expect #2 and #3 to ebb and flow as we need to pay for things, occasionally approaching zero; #1, in a perfect world, would go nowhere but up, pristine and untouched for decades.

I would also suggest, but do not yet have, an "insurance deductible fund," especially if for those with have high deductibles. For now, our e-fund is working double duty as the insurance fund, but if we had an accident that kept us out of work, the $1,000 mini-e-fund wouldn't be able to handle it all.

With no-fee, high-yield online accounts, such as those at ING, Emigrant, HSBC, E*Trade Bank, or GMAC (am I missing anybody?), you can easily keep separate accounts for each, or you can keep one account and earmark the amounts for each purpose. Personally, I'd keep the actual Emergency Fund separate, to discourage "borrowing" from the e-fund to cover non-emergency expenses. But I know myself well enough to put a lock on the proverbial cookie jar.

--
Raven
* Mine & fiancee's. I still refer to the credit card debt as "mine" because most of it has been around longer than she has.
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