Emergency Funds: One expense at a time
Posted by Gail | Filed under Saving, Take Control
Got caught up doing CBC syndication this morning so I’m a little late… but here ya go:
People often can’t wrap their heads around the idea of getting a pile of money together as an emergency. The concept of having six months’ worth of expenses covered is just too overwhelming. Well, here’s an idea that’ll make it easy peasy to get 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. These are your essential expenses: the stuff you must pay to keep the wolves from the door.
Go back over your list and cut out anything you’ve kept that’s not essential to keeping body and soul together. 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 Fund is designed to cover the essentials of life.
Now write in the average monthly amount for each of your essential emergency expenses. 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 shelter for our example, and say you need $1,200 to cover your rent or mortgage payment.
How much can you save every month? Ten dollars? $25? $100. Whatever it is, open up a savings account 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. For our example, we’ll say you can save $100 a month.
Now you’re going to save your first month’s worth of rent/mortgage expenses. So when you’ve got your first $1200 in your Emergency Fund 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 shelter 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 shelter money before you start on your food category, or if you’ll check the first box for each category and then start back at the beginning. 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 essential expenses.
Now you have a plan to build your Emergency Fund. All that’s left is for you to stop planning and start doing. Go ahead, pick up a pencil and a piece of paper and start making a list of your essential expenses. NOW!
March 19, 2012 at 9:55 am
That’s what I loved about Gail’s book Debt Free Forever. It totally opened my eyes to Emergency Funds. All these great points she is talking about are right there with the lil check boxes beside them. It made me think about what I really would need to pay during an emergency, and what would have to be cut out. My EF is still paltry small, but at least I have specifics on where I am going with it. Thanks Gail!
March 19, 2012 at 10:44 am
I love how this breaks down an emergency fund. We have been putting away $200 a month, but I have felt like it would never grow into 6 months worth. I am going to use what is described above to sit down tonight and figure out what we have already checked off and where we need to get. Sometimes without a measure of progress, it is easy to lose the discipline needed to reach a bigger goal. Thanks, Gail!
March 19, 2012 at 10:48 am
Great way of tackling an opportunity that may seem overwhelming. I know I over-reacted when building my emergency fund. I now have excess money sitting there not working for me. It’s nice to see after getting more comfortable working with a smaller budget that I can, in fact, downsize my EF a bit.
March 19, 2012 at 11:03 am
When I started my first full-time job in my twenties, which was a long time ago, I had never heard of an emergency fund but I knew I needed to be prepared for whatever came to be. I started saving and wasn’t comfortable until I had put aside enough to live on for a year if I lost my job. I called it my “What if I get fired?” account. I never lost my job but the saving habit was there so I was able to put myself through university and later put down 40% on my first house. To this day I make sure my EF would last a year if necessary. I would be so worried if I didn’t have emergencies covered. I don’t understand how some people don’t have even a small EF that would last a few months. It must be very stressful.
March 19, 2012 at 11:04 am
I love having an emergency fund. I do my best to save $100 a month just for emergencies, and I keep it separate from our planned spending account. Having this money has come in handy three times for two emergency vehicle repairs and an unexpected trip to the vet. I still have a long way to go before I have 6 months of expenses saved, but I have definitely learned how important it is to have this money… just in case!
March 19, 2012 at 11:13 am
We are very far away from having 6 months of EF saved but look forward to that day. I like the check-mark idea. It’s very tangible!
March 19, 2012 at 11:17 am
Because we have an all-in-one account, we have our emergency fund sitting in our mortgage account cutting down on the amount of interest we have to pay. We haven’t had to use it in a long time though because I budget for most ‘emergencies’ each paycheque. I have a similar system to the ‘jars’ except that I use ledgers and my categories include things like ‘pets’ (to cover vet bills), ‘car and house maintenance’ (to cover a new roof, appliance breakdowns etc.) and so on. Because I’ve been saving for these expected ‘emergencies’ our emergency fund has sat untouched for some time waiting for a true emergency like job loss/ sickness etc.
March 19, 2012 at 11:49 am
Marianne I love your idea of breaking ‘emergencies’ down even further. We have an emergency fund that hubby seems to look at and get a glint in his eye….like a new set of tires are an ‘emergency’. I tend to think of ‘emergencies’ the way you do – sickness, job loss, etc. and the other ongoing emergencies like car issues, home repairs as inevitables.
We’re a long way off from having 6 months in our ‘emergency’ fund, but we also have funds in the planned spending account that could be diverted in the event of a real emergency account. I like to think of the two accounts as ‘emergency’ and ‘inevitable’ accounts.
When I was young and in a nasty relationship I learned from my Mom that the best place to have an ‘emergency’ fund was in my feminine product box. I’m beyond that now, but still like the feeling of having a little something tucked away that is there just in case.
March 19, 2012 at 12:33 pm
M. you seem to be on the same wave length as me. As your basic expenses shrink, the EF you need can shrink correspondingly. Nothing I hate more than money pointlessly sitting around not pulling it’s weight.
Now, consider for a moment how far you can take the concept of lower expenses = smaller EF. At what point do you no longer need an EF? I know, I know, I may be run off the site for typing such a crazy thought. But that’s what we’ve decided works for us.
The critical detail is that we have two incomes and our basic, barebones expenses are ~55% of our take home pay. Other than the $1000 minimum balance we keep in our account (mostly to avoid bank fees and ensure we never go into overdraft) we now have no additional emergency fund. Theoretically, yes we could run up the credit cards, use the long dormant line of credit, withdraw from our retirement accounts, or increase the mortgage on the house I suppose. Those sources of cash are there but those aren’t options we’d actually consider. So for all intents and purposes there is no official emergency fund.
Five years ago when my husband’s lay off caused our total life re-evaluation we panicked because we didn’t have an emergency fund. In hindsight that was because we had no idea what our basic expenses were, and assumed we needed an EF and couldn’t survive without it – wasn’t an emergency fund created for just that kind of situation? Our total financial review and overhaul told us we were wasting a LOT of money and could comfortably life on way less than we made. That was our ah ha moment. That layoff was the best thing that ever happened to us. Now we had a plan – cut the waste and redirect massive savings to paying off the mortgage and boosting the RRSPs. Early retirement was suddenly a real possibility. Once he was back to work we began building up a fund so we’d never be in a panic again, but at some point we tried to imagine a scenario where we’d actually need to use it. After all, we’d coasted through the loss of the higher income for 2 months with no EI (due to severance pmt), and rolled his entire severance payment into his RRSPs. The only scenario we could come up that would require an EF with was that both of us were fired simultaineously with cause (so no notice, no severance, no unemployment benefits). We know from experience that layoffs are a possibility (1 for him, 3 for me) but we’ve decided a double firing just isn’t realistic. So we rolled the EF into the mortgage and RRSPs.
Our incomes are split about 60/40. Being able to cover the essentials on 55%, means we can live indefinitely on just the higher income if the lower income job is lost. Unemployment benefits received would just be a bonus. If the higher income was lost, first there would likely be a severance payment, but even without that, the unemployment benefits would more than make up the amount required for the lower income to carry everything. Employment benefits generally last about a year. If either of us was injured/ill we both have short and long term leave and disability insurance that would cover us in the same way. Isn’t the recommendation generally that your emergency fund be able to sustain your basic expenses for 6 mths, or even a year? If so, we’re covered. If either of us dies there is sufficient insurance in place to pay off the remaining mortgage and funeral costs with plenty left over. With a generous nest egg and no mortgage the lower income survivor could easily cover the rest.
Yes, it’s a little radical I guess but we’ve decided that for us an emergency fund is waaaay less critical when you have excess income on a regular basis. Any unexpected expense which we truly could not have predicted could be covered out of the regularly generated unallocated funds. Instead of having a large easily accessible (likely low interest) fund ready for disaster, we’ve instead opted to put that money to work on the mortgage and retirement savings. We figured the sooner we get the money invested, or pay down more principal the better. For us it’s all about getting to early retirement.
Going without an emergency fund certainly flies in the face of generally accepted common sense and every PF blog I’ve ever read, and would be a highly risky plan in most households. It wouldn’t be something I’d ever recommend in most situations. But we’ve decided that after careful consideration, once again we’re going to do things a little differently.
March 19, 2012 at 12:48 pm
About 7 years ago DH was unemployed 7 months and we did manage to scrap by on my single income ($32K at the time) so I know we can do it. I also know that I do not want to have to relive that experience any time soon so we have diligently been working on the EF since we moved to the jar system. What worries me these days is having the bottom fall out before we hit the 6 month goal. At this point we would have about 2 months covered.
March 19, 2012 at 1:51 pm
I have to save another $700 and change left to have shelter covered for 6 months (includes insurance, mortgage and maintenance fee).
BUT it will be one heck of a diet if I don’t have enough money to cover food!
I’m paying for a college course too this month so it will be difficult to save but I’ll do it.
There are so many emergencies that can happen in life – - wow! think about it. The only time I can see where I wouldn’t need an EF is if I had passed on.
March 19, 2012 at 1:52 pm
@JMK: I see your point and I don’t think you’re really far off. You’re a few years ahead of me in experiencing both an income reduction and spending overhaul but I think we’ve drawn the same conclusions. Hubby and I weren’t big spenders but we were so busy working that we never really investigated how much we were wasting money until he decided to leave the stress of the corporate world and our combined incomes decreased about 75%. Once I began a financial overhaul, we’ve been able to sustain ourselves quite nicely on a far lower income.
So why the EF? For me (since I’m the income earner now) I feel more secure (probably just psychologically, if I’m honest) knowing we have ready access to funds should a crisis arise. As time goes by and we get more FI, I believe that perspective will soften. For now I’m expanding my ability to function effectively on the cheap; refining my cooking skills, learning more DIY skills, and building a support network of like-minded folks. And my DH is a “Mr. Fix-it” extraordinaire.I look forward to the time where I can adjust the EF to the bare bones it should be and get on with a great life.
March 19, 2012 at 3:09 pm
Determining the 6 month total for your Emergency Fund is a very personal number. Its influenced by your tolerence for risk and how much security and safety is important to you to be able to sleep at night knowing everything will be ok. We are a 2 income family with a child. My biggest concern is making sure we keep a roof over our head and putting food on the table for our child in case of emergency.
I personally feel more comfortable saving an emergency fund total that takes into account absolutely no money coming in from any sources (just in case). I’ve planned for the absolute worst case scenerio (both of us being out of work) in order to have that buffer built in for the best case scenerio (eg. getting a severence package, getting Unemployement Insurance payments, only 1 person losing their job due to layoffs or health issues).
March 19, 2012 at 5:20 pm
@ JMK: Are you sure your short term and long term disability will pay out in all circumstances? For how long? If your spouse was critically injured, and needed long term care and frequent appointments, could you really continue working? Would all of the required medications be covered? And physio? It’s easy to think that you’ll be fine. But worst case scenarios do happen. Plus, if you do all your own repairs, maintenance, would you now have to hire out?
My biggest concern is something tragic happening to one of my kids. Would both my husband and I take time away from our jobs? Is it fair to have one work during that time? What about care for the other? And hospital parking, meals, are atrociously expensive. My friend’s daughter ended up with an illness that caused her to be in the hospital for months. The parking fees alone were killing them. Plus the Tim Horton’s located within the hospital. But planning meals that you can bring with you was beyond their capability. They were living moment to moment.
March 19, 2012 at 5:50 pm
I would be worried about no EF, as well….strange things happen in life and you don’t know when something will strike.
I would expect you still an EF when you retire (and don’t have the same means to save) for when your home needs to be repaired, an adult child may require assistance, you need some home care, some in home medical devices, you get ill while travelling or need to pay for a funeral…..I can think of many U-turns that can snag you along the road.
Being old and poor is many degrees worse than being young and poor.
March 19, 2012 at 6:22 pm
Good point Diana! My parents are caring for their grand-daughter; an unexpected expense that occurred after they retired. I think to not have money available is silly. Don’t like low interest rates? Then put your money in something riskier if need be, but make sure you have money available.
March 19, 2012 at 7:19 pm
This is possibly my favorite blog yet! I love this concept of the check boxes and saving per expense. I think this will curb a lot of folks who start off with good intentions, and then blow the few bucks they have saved on something fun… tempting for sure. As a Mom if you said to me, are you willing to trade 1 month of shelter for your family in an emergency for this purse/widget/furniture I would have to say HELLLL NO!
Five Stars for you today Gail, thanks!
March 19, 2012 at 7:36 pm
The concept of checking off the boxes is so simple I am annoyed with myself for not thinking of it. Why do we always try to complicate things. KISS is the motto to follow.
March 19, 2012 at 8:43 pm
I’m with Cas on this. Like JMK I’m not overly worried about an emergency that happend related to loss of job or an illness – we have coverage for that. But what about the time it takes for coverage to kick in?
My biggest concern and when we save for emergencies is about emergencies that happen away from us. We’re married with three young adults for children, living in three different cities. If something happened to one of them, we need the means to get there pronto!
Similarly we have only one brother among us living nearby and two sets of parents, a stepparent and five brothers and sisters living across the country. I would need immediate access to cash if I had to pick up and fly to them or assist them in some way. Also, our parents spend their winters in the southern US so that could mean travelling afar if needed to help out with the emergency.
I can’t say I always like saving for an emergency (I don’t even like thinking of them!) but I like the peace of mind.
March 19, 2012 at 8:53 pm
We’re in the middle of needing our emergency fund, and I need to tell you, putting that money aside isn’t OPTIONAL. It’s just not. I’m sorry, but if you think you’re covered, you’re protected, you have a backup plan that won’t require it, YOU’RE WRONG, because Murphy’s Law is going to hit you hard someday. Sorry if that’s too doom and gloom, but TRUST ME, because I’m in it. Right now.
I mean, sure, if you’re single and don’t mind being homeless, and have no one around you that will cry for you if you are, do whatever the heck you want. But for the sake of the people who love you if not for yourself, HAVE AN EMERGENCY FUND.
Want to know where we’d be right now if we didn’t have an emergency fund? Exactly where we were pre-Gail. We worked HARD to get out of debt, SO HARD, but if we didn’t have an emergency fund we would have effectively flushed all that hard work down the toilet because we would have fallen back on debt to “save” our butts when this crisis hit. Who on earth wants to throw away three years of sacrifice?? Not me, that’s for sure.
March 19, 2012 at 9:10 pm
Great info Gail! I had forgotten about that (need to re-read DFF)!
I agree with those who are talking about things other than a loss of jobs. I worry more about health with young kids, aging parents and a hubby with health issues. We had a fund started but ended up having to use it for health reasons and so now it’s back to re-building!
I’m going to go one step further Gail and do your thermometer or graph idea – colour in in smaller chunks until I reach a goal of 1 month, etc.
March 19, 2012 at 9:28 pm
Every journey begins with one step. And every emerg fund begins with $1. It’s really amazing how fast it can grow. For 2 years I have been building my emerg fund a dollar at a time and right now it’s enough for 3 months expenses. And I’m still putting money in and it still is growing.
March 19, 2012 at 9:49 pm
I LOVE this post – wish that I had thought of the check boxes with categories when I started to build my emergency fund. Now it is established and I have 6 months of expenses saved in a e-savings account within my TFSA. I agree that an emergency may be more than job loss – illness either to oneself or to family/friends can take alot of cash out of the budget. Being single with my parents passed away and one older sister who has 4 grown children with children of their own, I want to be sure that I’m able to take care of myself if something should happen but that I’m also able to lend a hand if it should be needed. Like Marianne I also have developed extra emergency/planned spending [in my case individual] accounts for condo ; cat ; car – just in case something comes up – last summer I need to replace my hot water heater and had the money in the condo account – no problem just did it. THANK YOU Gail for all the lessons
March 19, 2012 at 11:54 pm
A few years ago (in my 20’s), I chose not to have much of an emergency fund- and instead put the money towards RRSP & paying down the condo mortgage. I am going to be a devil’s advocate and say that there was some good logic towards this. I was in quite a secure job, and more importantly, have an accounting designation which makes it very easy to get SOME job, even if it may not be a job I enjoy. More importantly, I was single without any dependents. Very, very worst case scenerio I could have moved back in with my parents.
Given my very specific situation, I don’t think my reasoning was wrong. Again – I’m playing devil’s advocate here.
But here’s the kicker: Near the end of my 20’s, I realized that I was interested in a career change which would initially reduce my pay for the first 1-3 years. I wanted to quit my job. Now, I knew I could get “a” job that would mean I wouldn’t starve… but if I wanted to work in my DREAM job, I would need to cut my income. That’s where I saw the value of having some excess funds available. Not necessarily for an “emergency” in my case… but to allow me to take a chance and live for my dream, without needing to sell my small condo or ask my parents for help.
Luckily I was able to take a little time to save up some funds, and restructure my money a little bit so that after a few months I could quit and take the lower paying job. It really showed me how much better life can be if you build that flexibility into your finances. While I didn’t have a big stash of cash – I had done a lot of things right – like driving an old vehicle even though I could afford a new one, buying a condo that was less money than the bank would give me, and just generally keeping my overhead expenses low. I’m so glad I was able to take the new job opportunity when it was presented to me…
March 20, 2012 at 10:14 am
this is a great post Gail and urgently needed. I fell ill over 3 years ago and used my emergency fund as I had to take time off work in order to recover. Thank goodness for the ef. I have since had several bouts of illness but with an EF to help out, everything has been running smoothly financially that is.
I am in the process of building up my EF again but I know this gives me peace of mind when I need it which is very important for the recovery period of my illness.
March 20, 2012 at 11:09 am
Last Spring, we reach the 2-month EF mark. My husband lost his job a few months later. For those few weeks, we had to regularly go into the EF for little amounts. It was an opportunity for him to start his business. It’s going pretty well, so we’ve stopped going to the EF. I’m happy to say that we’re putting money into the fund again, the same amount as before! We are down at 1 month’s EF but we’re back on track.
I would never, ever go without my emergency fund or without my “planned emergencies” fund!
March 23, 2012 at 3:08 am
[...] This week Gail Vaz-Oxlade talked about the importance of Emergency Funds: One Expense at a Time. [...]
March 23, 2012 at 2:21 pm
I don’t think this really helps it seem any less overwhelming. In your example, It will be 1 year before these people can check off one thing, and 6 years before they can switch to something else. If they’re lucky, they’ll have an emergency fund before they die.