Emergency fund progress and thoughts
I’ve been thinking about it though, and I’ve decided to pause the “emergency fund” at $15k for now. This is mostly a mental thing. Bytta at 151 Days Off recently wrote about whether you should have a cash reserve or an emergency fund. She says labelling it an “emergency fund” would “plant in your mind how 1001 disastrous events could unfold in your life, hence unwittingly or subconsciously attracting them”. Instead she suggests calling it a “cash reserve” as it has business connotations of a fund to cover expenses beyond the usual expenses, and is also open to being used for new opportunities.
I’ve been thinking about it and I think she’s right. Also, I have a mental block about using the emergency fund – it has to be a real emergency before I’d want to tap into it, and I’d hate to see that number go down. The thing is we’ve got a lot of unknown expenses possibly coming up this year, some of which include:
- we don’t really know how much the baby’s birth will cost. We’ll be out of pocket at least $800 for the hospital stay (that’s our excess/deductible), and it’s possible there’ll be some further bills related to the obstetrician that are not yet budgetted for.
- we need to switch cars soon, selling Dave’s beloved RX-8 and getting a used Volkswagon Passat wagon instead. From the prices on carsales.com.au we think we can pretty much do a direct switch but I’m prepared for a couple of thousand dollars extra needed there.
- I get maternity leave paid at 50% of my salary for 24 weeks and we can live quite comfortably in that, but that leaves at least 16 weeks where I’ll not be bringing in an income. (We’re hoping Dave can take paid parental leave for the last 12 weeks.) We need some cash reserves to cover that time.
See, none of those are emergencies, so I would have a really hard time paying for them out of the emergency fund, plus how not-fun will it be to see the numbers going down! So instead, our excess funds are now divided into 3 branches:
Most of our mortgages are variable rate, which leads to some uncertainty on budgetting. So, I make a repayment buffer by budgetting the payments as if the mortgages are all at 8%, which is a reasonable forecast for say two years from now. But the mortgages are currently only at 5.74%, so the 2.26% difference in payments is put into this bucket. This gives my budget a nice buffer, and also, if rates rise up high enough that we can’t cover the payments with our budget, I can dip into these funds. I can’t see that happening at least for a couple of years, and we’ll have no problems by then.
I could actually pay it directly off our mortgages and redraw it later if needed, but there are some Australian taxation issues which make this less than ideal, so instead it stays in our bank account which has a 100% offset against the mortgage. (This is quite interesting for Aussies, so I’ll talk more about this another day.)
I’ve been doing this since we settled on the mortgages at the end of October, and there’s about $2,600 in this fund already.
This is where the “unassigned” portion of our salary now goes, ie what’s left over at the end of the pay cycle when we’ve budgetted for everything and any unexpected expenditures have been paid. Currently we’ve got a healthy $1500 per fortnight unassigned but at the end of this month it’ll go down to more like $400 when my pay is halved for maternity leave.I’ve only just started this bucket since the emergency fund is complete so it’s not got anything in it yet. Actually, it’s at -$400 because we withdrew $1000 to open an investment account (which is something else Bytta talked about and again, I’ll say more about soon). This is maybe what other people call their emergency fund, and where all those unexpected expenses I listed above will come from. Hopefully we’ll have enough to cover our needs and the time when I’m not earning, plus we’re due a fairly good tax refund when we get around to filing, but if not then I have the option of cashing out some long service leave which will cover us fine.
(To be honest, the only reason this is separate from the extra mortgage repayments is that I like to see where each bit of money is coming from separately. It feels tidy, but they’re all there to be used if necessary.)
So that’s it. My cash buffer: Real Emergency Fund, Extra Mortgage Repayments, and then our Cash Reserves. I’m feeling really good about this, it’s only a few months since we bought our latest house on the spur of the moment and I had quite a bit of anxiety about how we’d manage with the baby, and yet so far it’s working out fine and I’m feeling comfortable about the rest of the year.
That doesn’t mean I’m letting Dave buy any more gadgets though!