A recent article in Lifehacker put forth the idea that long-term emergency savings should be tied to a goal. A big goal. This association lends an emotional benefit to savings that are often invisible and untouchable.
We’ve worked so hard to squirrel away money for our emergency fund, but those efforts can seem useless. From the article,
What is a long-term savings fund?
This is the 3-6 months worth of expenses that many of us strive to save. These savings are then put into an account that is not to be touched except in the event of an emergency. The loss of a job or a medical crisis are examples of times when it would be appropriate to dig into this money.
The above article encourages people to connect this emergency savings fund with a long-term goal. Lifehacker lists extensive world travel and early retirement as examples of this principle in action.
Refinancing and Extra Principal Payments
In our family we’ve unknowingly done this by mentally connecting that lump of cash with our final mortgage payoff. We took out our first mortgage in 2004 after building our home.
We’ve since refinanced several times (who knew rates would drop so low?!) with the most recent refinance occuring in April of 2013. We pay an additional amount toward the principal of our mortgage each month. We also contribute a yearly lump sum payment toward paying off our house.
Connecting A Goal to Emergency Savings
With both of these additional payments in place we are planning to exterminate our mortgage by December of 2018. We’ve often chatted about paying the loan value waaaaaay down to $20,000-$40,000 and then slapping a chunk of our savings on it to finish.
This is essentially the same idea that was talked about in the above article; create a long-term goal and consider the 3-6 month savings fund as a contributor towards that goal. In this new light the large savings account seems less like an endless black hole and more like a debt-destroying bulldozer.
Long-Term vs Short-Term Emergency Savings
Please note that I’m not advocating using the smaller $1000 emergency fund in this way, only the larger three to six months of retained savings.
That smaller savings fund is established at the onset of debt reduction. It is wisely in place to use for short-term emergencies. This initial savings allows a family to continue digging away at debt without unexpected events halting the process.
Do you ever feel like your long-term savings don’t serve a purpose? Have you subconsciously connected a goal to this money?
Shared at Motivational Monday, Frugal Crafty Home, and Living Proverbs 31
Photo by OeilDeNuit