Emergency Fund or Car Fund

[BibblyBob]

I'm pretty positive I'm missing something obvious by even asking this. I've got a 2014 Mazda with 90k miles on it, running fine. I use it often for work. I aim to maintain it and drive it until it stops working, which hopefully will be 100k miles from now. I've owned the car for 3 years, and so far driven ~8k mi/year on average.

Right now I have an emergency fund of 6k, which is 6 months of expenses for me when discretionary spending is cut. The two biggest emergencies that would blow up my life financially are 1) loosing my job and 2) totaling my car. If I lost my job, I could use the 6 mo fund while I found another job. However my car would be more expensive to replace- I bought my car flat out for 8k in 2021, similar models/age/mileage now cost 10k, so I'd be looking at 10k +inflation to replace the car with a similar used one.

If I hope to have my car last 10 years without breaking down, and I budget for maintenance now, should I budget for the cost of replacing the car down the road as separate from my emergency fund? Or treat my emergency budget as the car-buying fund when the time comes, as I have no interest in replacing the car till it breaks down? If I do that, should I grow my emergency fund to 10k to pay for the full car price, or only save enough for a down payment? This would be assuming that I don't loose my job and total my car at the same time.

If necessary in FIRE/ERE, how does one budget for a car at all? If I retire in 5 years, do I account for the cost of a new car after that as part of retirement and plan my portfolio to account for that? Then my emergency fund would still need to account for a catastrophic car failure anytime before retirement is reached. Ideally once I retire I'd move to a place with enough public transportation/bikeable streets that I could forgo the car entirely- but if I'm not able to do that for whatever reason, I'm not sure what the best way to plan for a car is.

[2Birds1Stone]

I think you may be overcomplicating this a bit.

Having slack in your financial system (ie spending less than you earn) should theoretically increase your surplus resources over time. The buckets to which you allocate those funds are largely mental accounting. I wouldn't keep separate funds in a cash account just for the sake of replacing a vehicle, though an emergency fund is a great idea.

If your car breaks down, you may need expensive repairs to keep it running, but possibly saving yourself the cost of a full replacement. As you alluded to, there may be lifestyle design opportunities in the future where you won't need the car, and even now if you had the misfortune of losing your job at the same time as your car, you have an EF that while it may not cover a complete replacement, could provide different transportation options until you figure out a more optimal solution (ride sharing/car pooling/human power/motorbike/public transport/car rental etc)

[Chris]

If necessary in FIRE/ERE, how does one budget for a car at all? If I retire in 5 years, do I account for the cost of a new car after that as part of retirement and plan my portfolio to account for that? Then my emergency fund would still need to account for a catastrophic car failure anytime before retirement is reached.

Despite what dealer and insurance ad copy will tell you, your car is not an investment.

It's best not to think of it as an asset at all, but a subscription service that you pay for. Take the expected annual fuel, maintenance, insurance, inspection, and registration costs, divide by 12, then throw that into your monthly budget. To get the car itself into your monthly budget, amortize the cost over the number of months you expect to keep it, 120 in this case. At the end of the 120 months, the car value will be close enough to zero. Realistically, if you're able to keep the car beyond that, there's a good chance your maintenance costs will increase to eat some whatever the monthly amortization cost of the car was.

If you're able to go car-free in the future, great! Then that's a monthly expense that disappears.

[BibblyBob]

Thanks Chris- I think I may be misunderstanding a little. I'm not trying to see the car as an asset, but as something I need to save up for using assets. If I was saving for a new car as part of my FIRE portfolio for instance, my thought is add 10-12k for the cost of the car onto what my FIRE number would otherwise be. If say I'll need to buy a car every 10 years, I'd want to add ~34k to my FIRE number (12k every 10 years = 1.2k a year, divide by a rough WR of 3.5%). That's assuming my other current car expenses- fuel, registration, insurance, maintenance- stay the same. I don't have a good estimate of how much repairs would be on average over 10 years, since I haven't had any bad ones yet, so I'm not sure how best to account for that. I'm not sure this is the smartest option to go with, but right now its making sense.

[2Birds1Stone]

That does make sense from an accounting perspective. So if you expect to always need a car then it is good to project that cost into the future on a permanent basis and indeed save more if you plan on living off of your assets.