WHEN THE AXLE OF MY 2006 Honda broke in the middle of a North Philly thoroughfare in December and I needed $500 to fix it, I knew where to turn: my family’s “life reserve” fund.
Every year, there are articles about how most Americans have little or no emergency money. Whether the unexpected cost is a car bill or an unanticipated job layoff, it’s critical to save for expenses that aren’t accounted for in your normal budget. Losing your job may come as a surprise. But many of these expenses are predictable: We can assume that each year someone in our family will need dental work, a vet bill will be higher than expected or our heating system will need repairs.
So how do we prepare for these unexpected but predictable costs? As I mentioned in an earlier blog, my wife and I manage our budget through various categories—a strategy I highly recommend. One of our essential categories is a life reserve fund. Each month, we contribute a fixed amount to the reserve fund for big ticket repairs on our house and cars, as well as other random but common life events. Then, when the air-conditioning dies or a pothole wreaks havoc with our car, we don’t find ourselves making tough choices between covering these costs and maintaining our lifestyle. We know and expect to use our life reserve fund throughout the year. Although we don’t know when a precipitating event will occur, we want to be ready when it does.
If you’re considering building a similar reserve fund, I’d recommend starting with the end in mind. How much did you spend last year on the vet, home repairs and other “emergencies,” and what would that look like as a monthly contribution? Then, find a good interest-bearing online savings account and set up automatic deposits from your paycheck or checking account.
It’s helpful to distinguish a life reserve fund from a true emergency fund, which we’ve also built up over the last 10 years. Our emergency fund has nine months of household expenses and is meant for costs we hope never to face, such as mortgage payments if one of us lost our job or medical expenses if we suffered major health problems.
Both a life reserve fund and an emergency fund are important. But for those new to long-term savings, creating a life reserve fund is a first—and more attainable—step in preparing yourself to withstand the ebbs and flows of financial life.
Zach Blattner is a former teacher and school leader who now teaches teachers across the Philly/Camden region as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen.