Redefining my Emergency Fund

In years past, I've always earmarked the first $10,000 in my cash accounts as my emergency fund. I never let my accounts dip below this threshold because these funds were reserved only for genuine emergencies - job loss or medical emergency.

But in reality, there's two seperate classes of emergencies. The ones that I just listed are "expensive things that you hope will never happen." The other set is made up of "expensive things that you know are going to happen eventually." These include new roofs, hot water heaters, car transmissions, et cetera. I don't really have any dollars earmarked for these sort of expenses yet. But I should.

One of my goals for 2007 will be to significantly increase the size of my emergency fund. But instead of refering to it as an "emergency fund," I'm going to simply refer to it as "cash reserves."

My cash reserves will be earmarked for three kinds of expenses:

1) Real Emergencies - these are the expensive things that I hope never happen.
2) Rare Expenses - these are the inevitable, expensive home/car repairs that are difficult for which to plan.
3) Medium Term Savings Goals - this includes cash to pay for vacations, "family events," and cars.

I plan to exit 2007 with at least $10k earmarked for the first case, $15k earmarked for the second case, and about $5k for the third case. A $30k cash pillow will also generate about $100/month in interest in today's rates environment. That's a nice little perk.

I must credit the PF blogging community here for shaping my view of what a first-class emergency fund should look like. I think this cash reserve approach should go a long way toward planning for major voluntary expenses in addition to life's little curve balls that get thrown at us from time to time.

Happy Festivus.