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Have you ever dealt with an unexpected financial emergency?
When it happens, don’t you just want to scream? But as much as you want as you want to complain about it, you have to keep living.
Two years ago, the A/C unit in my car went out. At the time, I was living in South Florida and we were in the middle of a HOT Summer. Driving without A/C was unbearable! I took my car to my mechanic and was informed that it would cost $1000 to make the necessary repair. $1000 is a lot of money. Just a few months prior, I graduated from Financial Peace University. Thankfully, I had $1000 saved in my emergency fund. I used those funds to pay for the repair to my car.
It felt GREAT being able to pay for the services in cash. Besides, I’d rather place money to the side to replenish my emergency fund as opposed to paying a creditor on a monthly basis.
In this post, I will lay out a 3 step plan that will provide advice on how to prepare for financial emergencies.
1. Develop A Plan
Planning is essential. It helps you to determine what steps you need to take meet your end goal.
In order to successfully plan for financial emergencies, you will need to review your budget. How much money do you bring home and how much money do you spending on a monthly basis.
If you aren’t making enough money, cut back on your spending. If you purchase coffee every day, come up with an alternative option. No one is telling you to stop drinking coffee, either make it at home or work.
Another approach would be to find a creative way to generate additional income. Since I’ve been on this debt-free journey, I’ve seen many individuals sell items, take on part-time jobs and create side hustles to make additional money.
A plan will help you to remain level headed as opposed to running around like a crazed maniac. Some of the things that you should think about are:
- The cost of rent/mortgage
- The cost of vehicle maintenance
- Monthly Bills
- Childcare costs (if applicable)
2. Establish an Emergency Fund
During Financial Peace University, I learned about the 7 baby steps. The first step is to save $1000.00 to start an emergency fund!
An emergency fund is designated for unexpected emergencies. Examples include replacing flat tires and repairing the A/C unit in your home. Do not confuse an emergency fund with an impulse fund. If you want to go out and purchase a new pair of shoes – that’s not an emergency. Spending money on someone for Christmas just because you have extra money in your account – this is not an emergency either.
The purpose of the emergency fund is to ensure that you are able to make ends meet should an unexpected event arise.
According to Forbes magazine, 78% of American workers are living paycheck to paycheck.
If you lost your job tomorrow, would you be able to pay all of your bills? Suppose got injured and were out of work on unpaid leave status, would you have enough money saved up to take care of all of your new medical bills and recurring household bills?
If saving $1,000 sounds hard, think of it this way. All you need to do is save $100 a month for 10 months. That’s $50.00 a paycheck.
Disclaimer – $1,000 is a starting point. Ultimately your emergency savings will need to have at least 3 to 6 months of expenses in it. $1000 may knock a small dent into your savings but if you were to lose your job or perhaps be out of work due to something beyond your control. You’d want to ensure that you’re able to make ends meet.
For more information about Dave Ramsey’s 7 baby steps click here.
3. Automate Your Savings
Automation is the best thing EVER!
The best thing you can do for yourself is to automate the money from your paycheck to go into your emergency fund!
Don’t worry about manually logging into your online bank account and making a transfer every time you get paid. That would be extremely tedious. In fact, I probably wouldn’t have money in my emergency fund because I don’t feel like completing the transfer.
My employer does not allow me to divide my paycheck, so I set up a payment schedule through my online banking.
If you’re interested in automating your savings, check with your employer. Some employers give their employees the option of dividing your paycheck when making a direct deposit. As a result, a percentage of your paycheck can go to your savings account and the other percentage will go to your checking account.
In conclusion, you need to develop a plan, establish an emergency plan and automate your savings. No one can tell you how much you’ll need to save up. It is ultimately your decision so you will need to be straight forward and honest about your expenses.
If you’re single or married you will need to think about the specific needs of your family. Have you thought about childcare costs? If your child is in daycare how many diapers and wipes do they go through on a monthly basis. How much will a monthly supply cost that cost? Does your child participate in extracurricular activities? Are their participation fees paid monthly or weekly?
The government shutdown is a great example of why emergency funds are essential in today’s society. We can no longer expect other people to look after us, YOU are the one who holds your fate. It is YOUR decision to decide if you want to prepare for unexpected or not!
Let this shutdown be a prime example of how you need to prepare for a financial emergency. You never know when or how something can be taken away from you! It’s better to be prepared than to be unprepared.
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