Retirement Remedy: Getting Savings Straight

In a conversation with a younger married person this week I heard an all too familiar story:  Credit cards were all paid off with the tax refund and now the slow creep has begun.  "It's not that we're using the cards to eat out or travel, it's the emergencies that come up.  The car needs new tires or the oil needs to be changed..."

uhm hmmm...

Shall we get it straight once and for all?

I'm going to make myself mighty unpopular and say this.  Oil changes and the need for new tires are NOT emergencies (unless you have a slashed or punctured tire right away after buying new).  They are routine maintenance issues and should be dealt with by setting aside a small monthly amount to cover the costs at time of service. This is not savings per se, it is planning ahead.

We have a variety of what I call sub-accounts within our checking account but you could use an actual savings account, envelopes, or piggy banks to keep this money separate.  We save for minor home maintenance, routine air conditioner maintenance, routine car maintenance, annual property taxes and car tags.  If we know we have a major car maintenance issue coming up we amp up those savings to cover it. Generally your dealership will tell you well ahead of time that the need for those major sort of services is due.  These sub accounts get fed every pay period.  We don't go out to eat or buy groceries before we pay them either.

Then we have our monthly savings, funds that go directly into savings each month for the sole purpose of covering emergencies, true emergencies.  What is a true emergency?  Funds could be used to cover co-pays for unexpected medical expenses, not routine medical exams; a rental car if a vehicle is sidelined due to an accident or truly unexpected repair (like blowing a head gasket); major home repairs after a storm...Those are emergencies.  Emergencies don't happen often, they don't come about at regular intervals.  They are unexpected occurrences that necessitate altering your current state of living.

Every single financial expert recommends an emergency fund of at least $1000.  $1000 is not going to cover most emergencies.  It is a good starting point and  a huge help to have that money set aside but  I recommend you have at least $3000 and up to $5000.  My reasoning is based on personal experience.  The year we put the roof on the house, we used money we'd saved over the course of three years.  We didn't know we'd need to replace our roof immediately, but we'd begun saving fr that "some day".  Our next emergency came up one month later.  We'd just put $4500 into a roof after discovering major issues that had to be repaired immediately and our AC went out. In our region temperatures of over 100 are not uncommon in summer and that was a routine summer... Hello second bill for $4500.  We could have easily been out $9000 in a 30 day period.  One expense was semi- planned.  The second was not.  It was not an amount we could cover with our routine maintenance fund.  We opted to use a personal line of credit to cover the second bill and were grateful we could do so.  Paying a second big amount from our savings would have drained us.

We bought a car one year in July.  Two months later, John hit a deer on the way to work with the 'beater' car which had liability insurance coverage.  We had to buy a second car right away.  Boom, boom.  Again we made a planned big purchase and got hit with an unexpected expense within a month or two.  We had to use savings to cover the expense of that second car and although we bought another 'beater' it was still a little over $2000.    Again, a $1000 emergency savings fund would not have been enough.

I recommend if at all possible that you put aside 10% of your gross income each month.  Work diligently to build up savings so that you have both an emergency fund and more besides.  And even if you are on a fixed income or retired you should continue to contribute to your savings.

In the case of the young person, I happen to know that they have enough money left each pay period to eat out and travel.  I'd suggest they limit those 'pleasures' to one meal and one trip per month and save the rest for those routine expenses and to pay off their debt load.  I'd also suggest that while they might use their tax refund to help decrease the debt load, I'd put the bulk into savings to cover their real emergencies.  If at the end of the year they haven't had a major emergency, they might well consider paying off another debt in full.  And of course, this advice would work well for the older couple who are struggling as well.

As a quick review, routine maintenance issues are not 'emergencies' and shouldn't use savings.  They should be planned for ahead of time, that is why they are called 'routine'.  Emergency savings should be well over the $1000 recommendation given by most financial experts.   Regular savings should also be part of each pay period and even if you retire, you should continue to save.  What are we saving for if not to cover our future needs?


Kathy said…
Trolling around blogs and found you listed on 'if you do stuff, stuff gets done'. Enjoyed reading your post and you are so right. My husband and I were in the midst of retirement planning when the economy took a dive and we were both laid off. We retired and managed to be debt free but it requires a lot of careful planning. Oh to have been more prepared earlier, but of course we assume we will have the time we need and it just doesn't happen that way. I'll be back!
Rose Cole said…
Same here1 I am a 56 year old semi-retired Critical Care Nurse who puts aside money in savings not only for retirement but for routine maintenance and unforeseen emergencies.
I just read that 47 % of all Americans are living from paycheck to paycheck and are not setting aside any money for savings at all. The problem is we have become voracious consumers in this country. People have little will power or self - control and just spend, spend, spend. The fact that people have to rent storage units for their stuff is very telling. I know that what I am saying might sound rather blunt but it is the truth.
I want you to know that I appreciate your blog. Please keep up the good work. Rose in western NC.
Anonymous said…
Your post is spot on. People don't budget anymore. Many (not all) buy their wants first and then their needs. We budget each and every year. It isn't as hard as some might think.
I've been reading your blog for several weeks now and enjoy it. Keep up the good work.
Kathi in Florida
Kathy said…
Great post! Thank you!

Hope that your young friend will take your advice to heart.
JoAnn Baker said…
how very true! I worry about our younger friends, some never worry about tomorrow and actually use the line "I deserve this" I work hard, I should have what I want. Wants are nice, but when you have what you need... its even better!
Wendi said…
You hit the nail on the head with this post. I turned 44 in January and had a moment of panic about our finances. We upped our emergency fund to $2000 and plan to up it even more. We currently set aside a little each week to up it. I think it is Dave Ramsey that says Christmas is not an emergency since it happens every 365 days. Same thing with car tags and such.

Frugalista Mama said…
I agree with you 100%. We do the same things with funds for things we know will come up ~ medical costs, car and home maintenance, and I even have a fund for "kids school expenses". It adds up over time and then you are prepared when the expense comes along.
Anonymous said…
Very nicely said. I, too, agree 100%! A budget and an emergency fund are critical to my peace of mind. I like to know where I am financially at any given moment. I balance everything to the penny. As always, enjoy your posts. You are spot on. 😉 Pam
Anonymous said…
I am glad you addressed this. You found a nitch of budget information I have not seen anyone else mention. When we got married we started to set aside money for savings. We spent our money on the basic necessities. Most everything else had to wait. Cause we waited several things we really really wanted at the time seemed silly later too! ;-) We may not have had much money but it was ours and we were responsible to use it as we should. Not for just for wish list items. Later if there was any extra they could be maybe gotten. We have all we would ever need and more actually. As the years went by it was comfortable living like that and so any thing extra we did get was extra special actually. Like if you eat steak every day it is not special but if you have it seldom and love it then when you do eat it it is very very very good!!! We are comfortable and now can help others with our time and friendship now that we are retired. We still live as we always have and are happy with it and would not want to change. Teri, you note many things on many subjects that have needed to be brought out and you do it! I am ever so glad when more and more people find your blog and learn from you. It does not feel like you are just our teacher though but a close neighbor! You definitely have writing talent. The ripples of the knowledge you present here will go far! Sarah
Anonymous said…
When we had been married a few years, had a home, 2 kids and a new car I was talking to some good friends. I told them we found out what Dick's unemployment would be and that is the amount we live on, everything else went into our savings account. They had a hard time believing me. We were fortunate that we were able to put kids through college, drive new cars (only because my husband has no idea about car repair) and have vacations while still putting money away in savings. I knew that we would have no pensions and even then there was talk about how low SS would be. My husband was off work for several years before he turned 62 and was able to draw SS. We still paid a big health insurance payment(thankfully, had some medical issues that more than used up all we had paid plus a lot more!)and still have savings to supplement our SS payments. My husband never had a large income and we probably most of the time were not too much above poverty level. What people didn't see was that I sewed, shopped second hand, kept our belongings nice and never had to have the latest, or bought new things for the house on a whim, canned, couponed and pinched every penny until it squeeled. It would have been more fun to go spend, but now I see people who are retired complaining about how they can't do and I feel quite smug about the bit in our savings that stays there by still pinching those pennies. And yes, we do eat out, make donations to people and groups including our church, travel, and do things with friends on a regular basis. The latest book I am reading that someone else bought, I either got for a dollar at my local library or borrowed for free. The new blouse, came from a really great second hand church sponsored thrift shop, that not a lot of people frequent, the meal I made? ingredients from Aldi or made from inexpensive ingredients, or a really good piece of meat that sounds expensive, but not considering the cost per serving. The flowers in my garden (if summer ever gets here!) perennials bought cheap as tiny little plants, transplants from some gardening friends, and lots of patience! The list goes on and on. Gramma D.
Vicki in UT said…
I so agree with you. Many years ago, we saved up every cent we had to pay cash for a new car. About a month later, our fridge died. There was a lot of angst while we figured out how to get a new fridge. That next year, we set up a fund for repairing or replacing household appliances. I no longer had to worry about how to pay for the appliance repairman. We have car repair funds, gift funds for Christmas and birthdays, even a fund for shower gifts, funeral flowers, etc. It makes life so much easier.

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