Essential Emergency Expenses … One at a Time
Posted by John Draper | Filed under Budgets, Saving
Y’all have heard me say, propound, shout, that you need an emergency fund. There’s nothing worse than having worked hard to create a stable financial life only to have the whole thing toppled by an unforeseen whatever. The roof starts to leak, but your maintenance account was just wiped out by your scheduled house repainting. Your car coughs and heaves and you discover the trannie’s gone. Your plan to get pregnant next year took a leap forward.
Okay, so nobody’s arguing with the fact that having an emergency fund makes sense. And how much to have is a pretty standard rule:
You need the equivalent of three months’ income or six months’ expenses, whichever is greater.
Fine.
Or not fine. It can be overwhelming coming up with a huge dollar amount when you look at it as a HUGE dollar amount. It can be so overwhelming, in fact, that many people just don’t bother.
No matter how often I say, “Don’t worry, just start saving… even $50 a month gets you closer to your goal,” people still resist because the idea of accumulating thousands of dollars is so alien to them they think it’s impossible.
So here’s another idea for getting your emergency fund together.
List each category of expense you would have to keep covered if you hit an emergency. That may include rent or mortgage payments, food, medical costs, insurance, child-care, car payments, gas, and whatever else is ESSENTIAL.
Go back over your list and cut out anything you’ve kept that’s not ESSENTIAL to keeping body and soul together. Let’s face it, if you’ve just gone from two incomes to one, you CAN give up your cable, telephone, entertainment and everything else you wouldn’t die without, at least in the short term. Your Emergency Expenses should cover the essentials of life.
Now write in the average monthly amount for each of your Essential Emergency Expenses (EEEs). Then put six check-boxes beside the amount.
Pick the first expense you want to have covered. Most people pick either the roof over their heads or the food in their bellies. Let’s go with food for our example, and say you need a minimum of $400 for food each month.
How much can you save every month? Ten dollars? $25? $100. Whatever it is, open up a savings account somewhere where they’ll pay you a decent rate of interest and ask that the amount you’ve designated be deducted from your regular account to this account every month. In our example, we’ll say you can save $50 a month.
First you’re going to save your first month’s worth of food expenses. So when you’ve got your first $400 in your EEE Savings Account, you’re going to put a check-mark in one of your boxes. There. You’ve done it. One month’s worth of food money at the ready, just in case.
One of the decisions you’ll have to make is whether you’ll save all six months’ worth of food money before you start on your second category, or if you’ll check the first box for each category before saving more food money. That’s your choice. My choice would be to put a check-mark in the first box of each category, and then move on to save my second month’s worth of EEEs.
Okay, so now you have a plan to build your Emergency Fund. All that’s left is for you to start DOING it and stop THINKING about it. Go ahead, pick up a pencil and a piece of paper and start making a list of your EEEs. NOW!
June 10, 2008 at 12:03 pm
I’ve started on the saving part of it, but hadn’t thought about writing it down like that. That makes way more sense than just putting your best guess on a piece of paper; the numbers are still big, but in bite sized chunks it makes it far more attainable and less panic-inducing.
Thanks Gail! I’m going to make myself another spreadsheet today with my EEEs laid out clearly.
June 10, 2008 at 12:28 pm
Gail you’re so right to emphasize this. Having a cushion has altered my stress level significantly from when I lived paycheque to paycheque. Now, if I lost my job, I’d be able to survive. Once I got it through my head that paying yourself first really does work, I’m saving like crazy. Sat down and figured out how much I was spending and where (recording it every single day is best), and then figured out what was a fixed expense (rent & utilities) and what was variable and therefore controllable expense (food, donations, transportation–sold my car & now use car-sharing, clothing, no cable, etc.).
From that I could see how much I could potentially not be spending. That amount is automatically moved to my savings account every month. Then I have a chart dividing up what portion of that amount goes to emergency, what goes to saving for a house, what portion goes to my other goals (I have already asked my employer to deduct an RSP contribution from my paycheque and deposit directly into their group plan–unfortunately they don’t match. If you have an employer that does matching, that’s FREE MONEY and you should definitely contribute as much as possible).
You’ll note there is no mention of credit cards–I paid off & got rid of those 7 years ago and have lots of money now that I pay with cash; you wouldn’t believe the difference it makes until you get rid of them and the ‘must have it’ mentality. Also, any raise (hahaha!) or cash gifts that I get, goes right into the savings.
June 10, 2008 at 6:14 pm
If money is about peace of mind, an emergency fund should be more important than being debt-free.
I could have payed my student loan faster, but…
- my emergency account means that I could move elsewhere if relocation were needed for employment
- my emergency account means that if I am out of a well-paying job, EI would pay for mosts of the bills while no EI would be ok for a shorter period or a part-time job would be almost ok
- my emergency account means that I don’t fear a strike or lockout
- my emergency account means that my dogs are healthy and had the surgery they needed!
Money is not material; an emergency fund has huge non-material benefits!
I might not be able “to tell people to go to hell”, but I have some peace of mind.
June 10, 2008 at 6:17 pm
I forgot to say:
If debt can add up bit by bit ($5 here, $10 there),
so can a savings account!
June 11, 2008 at 5:36 am
Great advice (as always!).
Our emergency fund started as nothing more than a small overdraft amount kept in my savings account, then it became one mortgage payment in case there was a problem with payroll, and then it became one month of expenses, and now I’m in the process of making it two months of expenses.
This has been a huge load off, no longer begin worrying just before payday about money in my account. Minor emergencies require almost no effort anymore (where before they’d require all sorts of special running around).
As for savings, the trick is (as you’ve pointed out) getting started, once you build up a savings sort of momentum it adds up quickly.
June 11, 2008 at 10:39 am
Hi Gail,
What do you think about using LOC as emergency fund. If you don’t need it, you won’t pay anything and meantime you can use money to lower your mortgage or make RRSP/RESP contributions?
Thanks.
Alex.
June 12, 2008 at 10:48 am
This is a brilliant way to look at it Gail!
Thank you so much.
June 13, 2008 at 5:58 am
Alex: I see using a line of credit as still putting yourself into debt for an emergency. Ideally, you would actually have the money in a savings account in case something comes up.
Besides, if you assume you use a line of credit for emergencies, you’ll still need to pay it off, which results in monthly payments that you haven’t accounted for.
What if you make “minimum payments” for your LOC into a savings account so you have the money available if something were to come up?
(If your LOC begins accruing interest after 30 days, put it on your LOC, and pay it off before your first payment is due – then you get some extra time to accrue savings, but you’ll still pay no interest).
June 20, 2008 at 10:10 am
Oh Gail,
Your wise words have come to mind many, many times this week. I have been doing your program since I consolidated debts back in late March. I have been able to save just over $600 in that time while still paying down my loan (and throwing a little extra here and there).
This week I broke my front tooth which was an 18 yr old porcelain crown, and it will cost $923.40 to replace/repair it. Thanks be to God that my employer provides me with dental benefits and so I am responsible for 50% of the costs.
My first reaction was utter depression. I get so excited checking on the balance of my savings accounts. Now it’s going to be $450 less of what’s in there.
My second reaction however was completely different. It was pride. I am proud that I am able to cover the dental costs myself instead of asking my parents to help me out as I would have had to do only three short months ago.
Now I am determined to increase my savings contributions even if just by an extra $50 a month. I contribute $100 to my emergency fund and $100 to my RRSP. Odds are there will be MORE emergencies as life is just like that. And I want to be able to be prepared.
Gail thank you so much! The tools and encourage you provide are so empowering. My money mantra: I am worthy of paying myself first!
xx
July 20, 2009 at 2:33 pm
I worked on a few income reducing scenarios this week-end, should either me or my wife lose our jobs. In calculating the amount of emergency fund required to cover the base essentials, should we consider the amount supplied by unemployment insurance? We live in Quebec. We have no kids yet but planned to within the next 1-2 years. Our monthly essentials are around 4200/month, and we bring in around 7200/month net. By order of magnitude, we are dividing extra money towards debt + savings + non-essentials.
September 23, 2009 at 10:28 pm
I’ve managed to get myself out of debt completely but have neglected the emergency fund. So I have set a goal to have 6 months of expenses, without cutting back, saved by the end of 2010. Then if I ever have something terrible happen, I can pare back expenses, and make the six month emergency fund last longer.