How much do I really need in my EF?

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I’ve been reading a lot about emergency funds on random PF blogs lately, and the common theme seems to be the need to have a reasonable amount in your EF to avoid falling into trouble. While I never originally planned to fund an emergency fund at all until my debts were paid off, that has changed since I began this blog.
I’ve managed to assemble a $1000 fund, which I have no intention of dipping into.
That’s despite the fact I really need new tyres on my car and there’s not quite enough amassed in my billpaying account to pay for them.
However, in the past few weeks I’ve become quite focused on getting a bigger EF set up.
This has partly been because I’ve been following the struggles that JW has been going through over at Need to Be Debt Free (link via the Blogroll if you haven’t checked out
this great blog).
Poor JW has experienced an almost unbelievable number of adversities in the past few months but is still afloat (in fact, a darned sight more so than he would have been if not
for this debt repayment journey).
I continue to take my hat off to JW as he weathers this storm.
Anyway, it made me think that $1000 wouldn’t really make enough of a difference if I found myself in a similar situation, with a similar set of problems.

And since my next goal is home ownership, it’s fair to say that I need some extra cash
lying around _ above and beyond any home deposit _ to avoid the chance of having some big drama derail our mortgage repayments (which are likely to be hefty!) when and if we start making them. We really probably need to fund an EF to the tune of at least $3000-5000 to ward off any immediate dramas once we eventually do buy. This is especially true since we want to have a baby in the next few years too!
The idea of putting more towards an EF at this time pains me (and I doubt we will even
contemplate it until we have paid off our car) but I am starting to see how easy it would be to end up back in credit card debt if just one thing went wrong. As an alternative to saving the funds directly to boost our EF there are a few other options, neither of which are helpful in the short term:

1) Hope for the best and wait for those annual lump sums to come around again. This is not really a short-term option as we willl not be due for any payments now until after July 2008. This is fine if nothing happens in the meantime.

2) The other, perhaps even longer term option, is to save a larger deposit overall before buying a home and use part of the $7000 first home owners grant (FHOG) to boost the EF up to $5000. That would still leave $3000 from the grant for buying- and loan-related fees. Since my major concern is how we would cope with a crisis once we have to make
mortgage payments, this is probably the better option for us.

It’s interesting to me that as I become closer to being debt-free (well, free of `bad’ debt anyway), my goals and my focus have changed. Though I should be celebrating the approach of our last debt being paid off (early next year), instead I am thinking where the money will go next. It certainly won’t suddenly be available for pedicures and high fashion, though I might adjust my budget to allow for these as once-in-a-blue-moon treats! It sure proves that once you are focused on it, money management is a lifetime goal.

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1 Comment »

  1. I would budget a month ahead so you can maange all unexpected events. With a high income like JW, I find it sad that he has so much trouble. $10k last month income and no money? Um, it should have been better planned.

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