First Person: Replenishing Our Emergency Account

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It seems every time I build up a small cash reserve in our emergency account, we have an unexpected expense that burns it up. I rather keep just the bare minimum in savings as I funnel my money toward debt that will give us better cash flow if we were to experience a major financial crisis. However, I know it's not prudent to fly by the seat of my pants with two children and a home. After using much of our emergency fund on a replacement vehicle and car repairs, we came up with a plan to replenish our rainy-day fund without ruining all of our fun on sunny days.

Saving our tax refund

Although our tax refund is small, we plan to funnel it into our emergency fund. A few hundred dollars won't go very far in terms of eating out, but it can help us on the path of savings. For our emergency fund, it serves more as a psychological boost. It's nice to know that we can save financial "windfalls," even ones that are tiny. It's good to get into the habit of saving windfalls instead of blowing them on clothes and furniture.

Suspending our retirement savings

We plan to temporarily suspend our retirement savings until we have enough in liquid savings to cover at least 3 months of our monthly bills and expenses. Most experts say a person needs at least 6 to 8 months of expenses set aside in an emergency account. I will continue to save money for retirement and for our emergency fund after I have the first three months. We may also save first in a Roth IRA instead of a 401(k) so that we may access the principal without paying an early withdrawal penalty.

Paying less toward our mortgage

Even though I'd love to pay off my mortgage in another 7 years, it's not as important as having money for emergencies. We recently refinanced at 2.75 percent so I know that we aren't throwing too much money away on the interest. Instead of paying $1,500 to eliminate our mortgage in a little more than 7 years, I will opt instead to pay $1,200 so we can pay off our house in one decade. Since we only owe $900 a month, I'm making a middle-of-the-road compromise. I'll essentially have an extra $300 a month I can funnel into savings until we reach our 6 to 8 month mark that experts recommend.

Although some people turn to their credit cards for emergencies, I would only do that as a last resort. Part of the problem I have had with using a credit card is that my judgment becomes skewed. I can't see the line between a convenience purchase and a true financial emergency. Credit cards tend to lower my inhibitions when it comes to spending. By saving a portion of our discretionary funds for the next two years, we should be able to replenish our savings.

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