An emergency fund is one of those financial aspects of adulting that nobody particularly wants to put in place, but everyone appreciates it when it's needed. On top of that, since most of us only rarely need to tap our emergency funds, managing the money once it's in one is something people rarely think about.
Shortly after this article was published, where I talked about tapping my emergency fund to cover the costs associated with a broken sump pump, a friend asked me a great question about what comes next. She wanted to know: Now that I've tapped my emergency fund, how do I plan to replace the money I've taken out of it?
That's a great question, as another emergency could pop up at any time. If I don't get the cash back in the emergency fund before the next unexpected major expense hits, then what should otherwise be a manageable annoyance could instead become a major financial catastrophe.
Refilling our emergency fund is now a very high priority in our household. Here are the five steps we're going to take to do just that.
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1. Extra savings from other priorities
Every month, we save money that we target for specific financial priorities. The biggest priority bucket each month goes toward our next set of tax and insurance bills. Paying those bills on time and in full assures we don't pay interest, late fees, or installment payment charges. While we have a decent estimate of what those bills will be, we don't know all of them for certain until they post to our accounts.
June is the biggest month of the year for us on that front, with property taxes, homeowners insurance, car insurance, and liability insurance all due. As it turns out, while saving for those bills, we had overestimated their total cost by a few hundred dollars. That "extra" money is the first, and easiest, bucket of money to shift over to start rebuilding the emergency fund.
2. "Deferrable" savings targets
While those taxes and insurance premiums are "can't miss" priorities, other savings targets we have are ones where we have more flexibility. Our cars are all safe and functional and don't have to be immediately replaced. Vacations can be driving trips to see family, rather than flights, hotels, and restaurant dining in an exotic locale. And our home, while dated, is functional.
We put aside money every month, ostensibly to cover those deferrable priorities. In reality, there's a reason why we still have a 2003 Honda Accord in our driveway and why our kitchen still has the original 1989 builder's-grade oven, stove, and countertops. That reason can be summed up in the old saying, "People plan, God laughs."
As frustrating as it may be to see those priorities deferred, it certainly is better than paying 20%-plus credit card interest rates because the money had already been spent before the next surprise emergency. Both by tapping existing money set aside for those deferrable targets and by redirecting new money toward the emergency fund, we can work toward closing the gap.
3. Bonus income
I'm quite fortunate that in 2020, I earned a bonus that matures and pays out later in 2023. Like most bonuses, it's not guaranteed income, and I certainly can't count on receiving one every year. Yet at this point, it would take a fairly substantial disaster for that particular bonus to be worth $0 when it matures. If we're still short on the emergency fund when the bonus turns into cash, I'm optimistic that the bonus can provide a decent lump sum to help close the gap.
4. Taxable investment income
Many of our stocks pay dividends, and the bonds in our bond ladder pay interest. Of course, I'd rather reinvest that income toward our longer-term financial priorities. Still, the reality is that if after the first three steps, our emergency fund isn't replenished, those longer-term priorities will just have to either wait or get punted to get covered by another source of funding.
The beauty of typical dividend and interest payments is that they pay out as cash without making you liquidate your investment or otherwise lose your ownership stake. That makes them easier to part with than being forced to sell a stock or bond early. After all, if you have to sell an investment early, you're both relying on the mercy of the market and losing all claims to any future income from those investments.
5. Opportunistic stock sales
Finally, if all of those first four steps are insufficient to refill our emergency fund, we will look for smart opportunities to pare back our stock investments to restore that savings. As a value-oriented investor, I'm willing to part with my shares if the companies I own get too pricey relative to my estimates of the value of the underlying businesses' future prospects.
Again, I'd much prefer to reinvest the money I raise through those sales toward our longer-term goals. Still, the value of having an emergency fund is that it is cash that's available when things go wrong. The reality is that if it comes to this step before we're able to refill our emergency fund, then it just goes to show how incredibly important it is to have that cash available in the first place.
After all, if it ends up taking that much effort to replace it, then it means it served an incredibly valuable purpose by being there in the first place.
Get your emergency fund in place today
As a pile of cash that's likely losing ground to inflation after taxes, an emergency fund is not the most exciting part of anyone's financial plan, but it is an incredibly important foundation. Having it in place can make the difference between a large surprise expense being a modest challenge and it being the start of a major financial death spiral.
Make today the day you start or rebuild your emergency fund, and get yourself in a better spot to handle those financial curveballs life will throw your way. It may not be the most fun use of your money, but when you need it, you'll certainly be glad it's there.
