Goal 56. Save $1000 Emergency Fund

Hi everyone who reads my post! Does it make you sad to be losing the penny? Today we are going to talk about a subject that can get really emotional, really fast..... money.

But! This post is meant to encourage. It really encourages me. Here is the basic set-up. In the past two years while living below the poverty line (which is actually cool because then you get free money from the government! Yay free money!) Prince Charming and I have been able to save up our $1000 emergency fund and last year saved $9,000 for school.

Source.

Before we get too far in saying how great we are, lets just explain that Prince Charming and I are both finishing our undergrad degrees (seriously this has taken 10 years, on & off) and I currently have a 0.5 part-time position. We do have debt, and we are still incurring debt, but we approach this much differently than we have in the past. Instead of just spending money and then borrowing when we run out we actually have set a certain number that is our threshold. This is the total amount of debt, including credit cards, personal loans and student debt we are willing to take on, and we have to devise our plans from that. Part of our plan is debt-avoidance, which means that we have to plan for and then save for what we get. What do we do about unknown or irregular expenses? This is where our savings plan comes in.

What are sinking funds?
We save based on sinking funds, which I first heard about when reading Mary Hunt's Debt-Proof Living (try getting it from the library!). In her book she outlines a way to organize this on paper, but I just set each sinking fund as a line item in my computerized budget. Essentially sinking funds is money you save monthly that go towards irregular expenditures. For instance, Car Maintenance is a good example of a sinking fund. Each month we put $70 into our car maintenance line and then leave it there. When adjusting our budget we expect to not spend this money each month, so we simply carry this money forward into the next month. Then after a few months of adding $70 each month we have an amount that is high enough to actually get our car repaired. Recently we took our car in for "after-winter" servicing, and also because we had a check maintenance light. We got an oil change and all new spark plugs, plus some other maintenance adjustments. The bill was around $250 and when paying we didn't even blink. We just paid (using our credit card after reading this post) and took our car home. Then in a few days we paid off the credit card from our checking account. No change to our budget at all. 

In the past before we started using sinking funds having to get car maintenance just meant our credit card balance would go up and we would have no idea if, how or when we would be able to pay this off. Not a great feeling. We currently use sinking funds for: Car Maintenance, Work Expenses (which mainly goes towards my annual licensing fee), Medical fees (for amounts not covered in health insurance), Education, Vacation, Christmas Club, Emergency and Electronics. Clothing is also a sinking fund because we have such a small budget that we have to save for several months.

There are two ways to set up sinking funds for yourself. The first is to think about any irregular bills that you must pay. This can include property and income taxes, if you pay insurance yearly and other known expenses. Take the amount that will be due and divide by the number of months you have left until that day and that will be how much you need to save monthly for that fee. Then once paid, take the next year's amount and divide by 12. Then when it's time to pay the bill you already have the money and don't need to freak out at all.

The other way is to take the unknown things. This includes stuff like car maintenance, vacation and christmas budgets. Set your desired amount and then do the same procedure as above. Come christmas you shouldn't even have a blip on your credit card. But if you do, just adjust your expectations by either resolving to stick to different ways to save money or increase your budgeted amount for the next year. Remember a budget is just a plan and you are in control of that plan.

If I have sinking funds why do I need an emergency fund?
An emergency fund is the most nebulous of sinking funds because its basically a miscellaneous category, but it is mainly for job loss. In the case that you lose your job or move to a different job and lose a few weeks of pay then your emergency fund can cover that. The $1000 emergency fund is by no means an entire emergency fund (most financial professionals recommends an emergency fund that equals your current budget needs x3-6 months) but is "Credit card insurance." It just keeps you from having to use your credit card when unplanned expenses come up, or if you need more money for an unknown expense than you currently have. Saving this kind of insurance should also be the first part of any debt repayment plan as it helps you avoid taking on more debt for emergent situations. Since this is supposed to be emergency money, not I'm tired don't want to make dinner money it is best to set up a few loose rules about its use. I recommend you don't use this money until all people who own this money agree to it. If you are single, maybe you want to talk to a friend about it and get their opinion. Also try to sleep on it. Basically you want to make sure it is only used in true emergencies, so that it will be full and ready when one comes up. I also talked about other kinds of insurance in another post.

How does this help me?

So! Now that I have explained the mechanics of sinking funds I want to add some more encouragement! Since we have started using a budget and sinking funds we have been amazed at what we have been able to do with our money. If you are a student debt is a reality, so we have taken the approach of limiting our debt instead of trying to eliminate it entirely. By saving up for items that we want or need we haven't had to increase our debt for these items. This has allowed us to continue to have the opportunity to continue our education, despite the ridiculous amount of time that it has taken us. We both realize that we are so privileged to be able to do this, and while we know that continuing our education will significantly increase our income in future years, we don't want to be so indebted at that time that we still have to live the poor life. By saving our money and avoiding debt we have been able to do what we want to do, instead of having to be tied to jobs, locations or houses. Our money hasn't had to control our decisions, but rather we have been able to use it as a tool to help us do what we want. To me this is the beginning of freedom and it is certainly much a much simpler way of living.

How do you manage your savings and do you have an emergency fund? Please comment below!