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We didn’t want to spend another night in a freezing cold rental house. The heat was out, and the temporary space heater was woefully undersized. Seriously–I was reading my book with gloves on. But we also weren’t hearing any news from AirBnb customer service—would we be able to get a refund? It was a pickle. And when life puts you in a pickle, an emergency fund helps ensure that money isn’t a source of additional stress.

Baby, it’s cold outside

Upstate New York is snowy and cold in the winter. Animals grow thicker fur, humans need a decent jacket, and a house needs a central heating system. When we walked into our small rental cabin last weekend, it was clear that the central heating was broken, and that our jackets would need to stay on.

(Not our cabin, but it’s close)

We called AirBnb customer service the next morning to discuss. Ravi was very helpful and sympathetic. He escalated our situation to a Case Manager, and then we waited for a call back.

We grabbed breakfast and coffee–no call back. We visited tourist traps and gift shops–no call. Then we went “full throttle” on the “Sky Coaster”…still no call back from AirBnb. We had no idea if we’d get a refund, or get a new place to stay, or be able to continue on with our weekend as planned.

Emergency fund in the budget

Thanks to some personal finance decisions that we’ve made over many months, this $300 issue wasn’t stressful. Proper budgeting and a fully-funded emergency fund gave us the flexibility to decide where to sleep. We didn’t have to worry about the financial implications.

We felt AirBnb would probably refund us (…eventually). But what if they didn’t? We’d have eat to the money we’d already spent, and spend more on another place to stay. Nobody wants to spend twice for the same service. But this is the exact reason to have some slack built in to your personal finances.

Thanks to YNAB*, I know exactly how much money I have assigned to various “jobs” in my budget. There are simple jobs, like next month’s mortgage and groceries. But also more infrequent jobs, like an “Auto Maintenance Fund.” I know the car will break down eventually, but I don’t know exactly when. In my one year review post, I shared my experience of tracking every single dollar in 2019.

My Emergency Fund is part of my budget. For a few years now, I’ve been earmarking a couple hundred dollars per month into that fund. Why?

Did I know that one day I would need to make a $300 decision about a cold cabin on a wintry getaway? Certainly not!

But I was pretty sure that–eventually–I would have to make a quick decision involving hundreds (if not thousands) of dollars. Did I want to make that decision using next month’s grocery money? Not if I could help it!

How big should an emergency fund be?

As with many personal finance topics, the easiest answer is, “It depends. Different strokes for different folks.” But let’s talk about some of the options.

The basic emergency fund should be enough to cover a sudden car repair, or household replacement, or the deductibles in your insurance. It should be enough to answer the question, “If you needed $500 tomorrow, where would it come from?” The amount will be slightly different for everyone, but it’ll typically be in the $500 – $2000 range.

The more advanced emergency fund answers the question, “How will you support yourself and your family if you lose your job?” Rather than spending on a sudden need, the financial expense becomes: what do you need to live off of for a few months while you search for your next job? Typically, 3-6 months of living expenses is recommended. If you know ways to get quick cash, that might affect how big you want your emergency fund to be.

This is another spot where a budget comes in handy. If you know that your average monthly expenses are $3000, then all you need is arithmetic to calculate 3 months’ expenses. No guesswork required.

Thawing out…

While a chilly cabin isn’t everyone’s “emergency,” our experience was an excellent example of the safety provided by an emergency fund. When life threw us a curveball, money was not a source of additional stress.

After last week’s monster post about the index fund bubble, this one is short and sweet. Extra savings and emergency funds matter. They’re shock absorbers when you hit bumps–big, small…or cold–in the road. It’s not a matter of if, but when.

As always, thanks for reading the Best Interest.

-Jesse

*Note: you and I both get a free month of YNAB if you end up signing yourself (or someone else) up with the link above. No extra cost to anyone involved. You get a 34-day trial, and then an additional free month. That’s two free months to figure out if you like it.