The importance of an emergency fund

What a difference a year makes.  One year ago today was a Monday, much like any other.  My kiddo and I had gone to the store to get Easter eggs for his class egg hunt.  Like a lot of four year-olds, he had begged for some shiny toy and had thrown a temper tantrum when I wouldn't buy it for him.  When we got back into the car, we had a talk about stuff isn't important and how he had so many toys already (a lot of them are from my husband's childhood...my house looks like Toys-R-Us circa 1984 exploded).  Then we went home and made dinner and he asked to watch a movie before bed, so I let him put a movie on the TV in my room to start settling down.

About 30 minutes later, I got a weather alert on my phone.  It wasn't exactly unexpected because the EMA had warning of potential bad storms for a couple of days.  The dog had been pacing and, unusually, hadn't asked to go out all night.  But this was different, it was a tornado warning, not a watch.  I flipped the TV over to the legendary local weather reporter just as he was saying that there is a possible tornado heading towards my city.

And then the power went out.

That was the point where I decided that maybe we should get in the hallway for a little while.  I grabbed the kid and the blankets and pillows and set up "camp."  I told my husband to get in the hallway and gave the kiddo his tablet and turned the volume up as loud as it would go.

I've always heard that a tornado sounds like a train.  I never did really hear it over the kiddo's game noise.  I felt it.  My ears popped when the pressure changed.  What no one ever talks about is the smell.  The first sign that the roof had been breached was the overwhelming smell of pine.  At first I thought it was where the rafters of the house cracked, but when I stepped outside I learned that it was probably the 15 pine trees that used to stand in our yard.

Just as the all-clear was given, the reporter on the radio came back on and told us to sit tight because there was another one on the way.  We sat in that hallway, this time under a mattress, listening to the rain pour through the holes in the roof.  In total shock.  Thankfully, that one went north of us and caused only minor damage.  The NWS thinks that there might have been a third, smaller one nearby that night as well.  As that storm passed, the chainsaws started and they didn't stop for three weeks.

Once we were able to start gathering ourselves, and taking stock we realized that there were at least two trees down on the house.  One came down right above where we had been laying watching the movie.  It also punched a hole in the living room ceiling.  Another took out a corner of the back porch.  The car that had only been paid off for two weeks (the title had come in the mail only the day before the storm) was missed by inches.  All-in-all we were very, very lucky.  We lost 23 trees, and only two of them actually hit the house.  No one in town was killed and there were only a handful of injuries. 

Luckily, my in-laws who live three houses down were nearly unaffected.  They lost a gutter.  And they were out of town.  We were able to stay there for a couple of days until the cold got to be too much and we moved to a hotel.  We spent a total of 4 weeks in three different hotels.  And then another six months living with my parents, who also live on the same block, but were able to stay in their home.

And this is where the emergency fund comes in.  It was such a relief to be able to roll up to the hotel and reserve a week, and then another, without having to worry about what would happen if the insurance company didn't reimburse us in enough time to pay the CC bill (they did, BTW).  I didn't have to worry about whether or not I'd be able to cover deductibles.  We did have some out of pocket expenses.  And in the interest of full-disclosure, we did choose to go ahead and do some home improvement things that we'd been wanting to do.  And we chose to take on a little bit of debt to do that.  It's very low interest debt, secured by money in our bank account.  It's one of the few cases where we're not doing the mathematically "correct" thing, but instead doing the thing that works for us psychologically.

But the real moral of this story is that just because you've suffered one emergency doesn't mean that another one isn't right around the corner.  In April, the engine in my husband's car threw a rod and he decided to put a new engine in it rather than getting something new.  In November, he totaled my car, you know the paid-off one that survived the tornado.  I decided to replace it with something exactly like it.  Same year, same color, upgraded trim package, and many, many, fewer miles.  What can I say?  I believe in buying what I want and driving it for 10-15 years.  I figure that my now 5 year-old will drive it as his first car.  We paid a little more than insurance covered due to the low mileage.  Finally, last month, my husband got laid off from his job.  We're still doing okay.  Even have the ER built back up.  I'm not going to say the last year hasn't been stressful, but it's been a whole lot less stressful than it could have been.

To Fee....Or Not To Fee

Not me, but this is pretty close to my ideal bill-paying setup.

So, my kid's school has an online system to pay for school lunch.  This is awesome!  Anyone who knows me, knows that in my perfect world, everything could be paid for online (I'm looking at you, water company).  Hell, I haven't had an actual checkbook in almost 10 years now and I can count on one hand how many times I've actually had to have a cashier's check cut in that time period.

However, I've noticed a trend lately of parents bitching about how expensive the convenience fee is for this service.  Okay, so it's not exactly cheap.  It's $1.95 per transaction and if you have more than one child at the school each child has to be a separate transaction.  The beauty of it, to me, is the fact that it's a flat fee rather than a percentage.  So, if you are able to pay for the entire semester's meals at once like I did this morning the percentage is something like 1.2%.  Seeing as how I'm getting 1.5% back on that card, I'm coming out ahead.  Though, I can see how if you had more than one kid and could only afford to pay by the month where that fee would be closer to 5%.  At that point, the $2/month/kid would probably come close to outweighing the $20 to get a checkbook and the convenience of paying online.

There are some fees that I don't mind paying.  Like this one.  Or the one that means I don't have to go by the bank and get cash when I renew the car tags once a year.  And there are other, similar, fees that bother me.  Like the $2.95 fee to pay the power bill with a credit/debit card.  I've almost always paid it with a linked bank account and at this point, inertia has taken over.  In theory, whenever the bill is over $193 (which is about 5 months out of the year), I'd do better to pay it on the card.

Long Term Bills

I said in my last entry that I would talk about what I call long-term bills.  This isn't a new concept.  I've seen the idea called sinking fund, or a freedom fund.  All it really amounts to is taking bills that are substantial, due regularly, but infrequently, and putting a bit aside every month or every payday.  You may not see much point in it at first, when you think of the things that you could use that money for.  But a day will come when you are very glad that you did.  Today is one of those days for me.

August is one of those tight months for us.  Our car tags are up for renewal.  And the semi-annual car insurance bill is also due.  I spent just over $500 on Wednesday just on stuff to keep my car legal.  Before, this would have been a source of major stress and probably would have meant hitting the emergency fund.  But this morning when I sat down to pay the credit card, all I had to do was to move the money from the Long-Term Bill account to the CC Payment account.  Each month, the car tags end up being about $17.50 and the insurance about $60 (plus another $20 for the other car's insurance).  It's so much easier to put a little aside each month than to try to scramble up the money all at once.

I have several things that I use this technique with.  In addition to tags and insurance, I save a little for Christmas/Birthdays/other gift giving occasions each month.  I also have a couple of expensive hobbies.  Both tend to require large purchases during specific times of the year and it's very nice to have a fund when I need it because I set aside $20-40 a month during the off-season.  Psychologically, it's nice to have that money earmarked because I don't feel guilty about spending it on its intended purpose.

Account Setup

I want to talk a little today about how I have my accounts set up.  I have 5 checking accounts and 4 savings accounts.  Yeah, the tellers at my credit union probably think I'm nuts.  They are all connected online, so I can move my money around easily.  The separate accounts are just to keep things classified.  For those of you who are familiar with Dave Ramsey's teachings you can think of it as a digital envelope system.

The savings accounts are pretty straightforward.  There's our contingency fund, which is nothing more than an emergency fund.  It contains enough money to handle something like a broken water heater (BTDT) or blown transmission (crossing our fingers on that one).  Then there is the vacation fund.  I've mentioned before that travel is very important to us.  And while we do try to travel as cheaply as possible, we do regularly deposit money in the vacation fund.  Next is the overdraft account.  In theory, we should never have to use it, but there is enough in that to cover minor mistakes.  Finally is what we call the college fund.  It's money that we are saving for our son's college.  Every paycheck, we put a couple hundred dollars in it and then at the beginning of each year, we deposit that into a Roth IRA.  This account actually doubles as a longer-term savings account (for very, very dire situations only...think long term unemployment) because we didn't open the IRA until he was older and we are limited each year as to how much we can actually deposit.

The checking accounts are a little more interesting.  The first is the main account that paychecks are deposited into and money is disbursed out of.  That is the account that the cashflow planning tool creates.  It is the central account.  Then my husband and I each have our own checking accounts.  That way we are each handling our own day-to-day spending.  Next is the credit card payment account.  I try to treat credit cards like a debit card.  As soon as something is put on the card, the money is moved into the payment account.  Auto-pay for the full amount is set up on every card.  Are there occasions where I float a bill from one paycheck to another?  Of course.  And the planning tool lets me feel confident doing that.  If I know that "yeah, I don't have the money today, but I'll have it in  seven days" then I will do it.  I try not to float expenses that aren't already in the plan, but sometimes life happens.  The final account is the long-term bill account.  I'll talk a little more about long term bills later this week, but essentially this account is used for putting aside money to pay bills that only occur annually or quarterly or every six months.  There are two ways of doing this.  You can have one account for each bill (in which case, I'd probably use a savings account rather than a checking account).  Or you can use the long-term bill tab of the tool that will help track up to 12 different things.

Introducing the Cashflow Planning Tool

I put the instructions and link to my cashflow planning tool up today.  You can find the instructions for the tool here and it will link to the workbook on Google Docs.