It is done. Finally. Or at least it will be within the next few days. We will have built our emergency fund up to the nice round number of $30,000. The general rule of thumb is to keep 3 to 6 month’s worth of living expenses on hand for emergencies or unexpected events. So much of our life has been focused on saving money and paying off debt, it’s different to now be thinking more about increasing retirement contributions, opening 529 plans for the kids, or just buying a bunch of useless stuff. (Note from wife: In other words, can we buy a couch yet? Is anyone with me? At what point do you/did you decide to start buying the “stuff” that you didn’t buy when you were in debt or working up a savings?)
A $30,000 emergency fund for my family of 5 equates to 7 ½ month’s worth of living expenses. Our average total monthly expenses are about $4,800. If we truly experienced some type of emergency and had no jobs, we would have no income to pay tithing on (10%). In this scenario, our monthly expenses would be closer to $4,000. A $30,000 emergency fund divided by $4,000 monthly expenses = 7.5 months of security.
The 3-month emergency fund: $4,000 x 3 months = $12,000
In reality, we would probably be fine with a 3-month emergency fund. I feel like both Amanda and I have enough skill and experience in our fields that we wouldn’t have too much of a problem finding work if we had to replace our income. I just like to lean to the conservative side when it comes to money.
The 6-month emergency fund: $4,000 x 6 months = $24,000
6 months is more in line with my comfort zone, but I like nice round numbers, so we kicked it up to $30,000 rather than $24,000. (Amanda’s note-by “we” kicked it up to 30,000, he means “he.” )
The 1 year emergency fund: $4,000 x 12 months = $48,000
I think I would love the increased feeling of security that I would derive from having a whole year’s worth of expenses stashed away, but I don’t know if I would go that route unless I were self employed. Also, as a finance person, I’d feel guilty for stashing so much money in accounts with such low interest rates.
What’s comes after the emergency fund?
This is what we are planning to do, and it could possibly change. Note that this is obviously not my recommendation for everyone because we may be in entirely different circumstances.
1. Take 401k contributions from 5% up to 15%. Based on my current contributions and company match (and assuming an 8% return), this is the difference between having about $2M vs. $3M when I hit 60 years of age.
2. Open 529s for the kids. Ideally, I would have done this 7 years ago when our first was born, but we had to work our way back from the costs of the MBA. Now that we are there, I am revising our goals regarding the kids’ education funds as well as plans to get there.
3. Save a $10K spending fund. The spending fund is not to be confused with an emergency fund. There is no reason to use the emergency fund for large expenses you can easily foresee. We know that eventually we will need a new roof, a new car, a new computer, etc, and that is exactly what this fund will be used for. In my mind, the emergency fund is for truly unexpected emergencies and should not be used unless it’s absolutely necessary.
4. Put the extra toward our foreign living fund. I’ve said before that we’d love to give our family the opportunity to live in a foreign country, ideally in Latin America. Amanda and I just booked our scouting trip/vacation to Nicaragua for November, and I can’t wait! And, it only cost $217 for round trip tickets (more on that later).
February in review
February was our best month in a while in terms of budgeting. We spent and saved almost exactly what we planned if you exclude our federal tax refund (which I forgot).
Violin income – Amanda bills every 3 months. February was the last month of her billing cycle, and she was able to collect the final $700 dollars that she was due. I forgot to account for her expenses (the main one is child care), which is why I was just above $200 off.
Other – We had a federal refund of $737. I was hoping for less, but I’m satisfied as long as I can get it within $1,000.
Groceries – A round of applause for my wife! She set out to keep it under $600 this month, and she did it! I was able to catch her for a few minutes for a brief interview:
Me: What would you say was the biggest contributor of your February grocery budget success?
Amanda: Going shopping by myself instead of with my three little helpers (“Can we get hot chocolate? Can we get hot dogs? Can we buy a fish?”…). Clipping all the online coupons beforehand- it wasn’t as painful as I thought it would be. Also, not buying anything after the total hit $150 per trip. We had to go without a few items each week. So we did well, but we did use cans from food storage, so we’ll just end up spending more another month I think. No promises for March…31 days instead of 28.
So there you have it.
Utilities – This is Valentine’s story. Wait for it: I budgeted the water, electricity, and gas based on the prior year usage. The water and electricity came in pretty close, but we were almost 40% under on gas. I guess we used the heater a lot more last winter, which makes sense given that it was the worst winter in 30 years. But also, our gas fireplace has been broken since October. It’s my wife’s love. (In her eyes, what’s more cozy than gathering your three little home schoolers close around a fire everyday in the middle of winter to study phonics?) My valentine gift to her was to get it fixed. So our gas bill will definitely be going up.
Kid stuff – We bought a new bow and rented a smaller cello for my daughter. It made a big difference in her practicing, so it was worth it to us (read, it was worth it to Amanda).
Doctor – There are always random medical bills coming in. I’ll eventually get a better bill tracking system to be able to plan more effectively. My method now is to not pay until right before they go to collections.
Auto – This is not real savings but rather a timing issue. I meant to get the oil changed this month but failed to do so.
Everything else was pretty close, so we hope to continue the trend. I think laying out an annual plan that I continuously tweak has been very helpful in helping us stay on track with our financial goals.
What’s your ideal emergency fund amount? What will you do (or did you do) when you have it?