Ways and Means of Coping with an Emergency
Posted by Gail | Filed under When Ca-Ca Happens
Experts have been touting the importance of having an emergency fund since Moses was a lad. So why is it that so many people still don’t have enough (or any?) money set aside just in case? Reasons and rationales abound.
“I’m paying off my debt. That’s the most important thing.” With the amount of debt people are buried in, it’s no wonder people want to get rid of it as fast as they can. But having a single focus is never a good way to create balance. Money in the bank gives you options – ways to deal – so that you can stay on track with debt repayment even when the caca hits the fan. Having no cash at the ready means you’ll no doubt be forced to use your credit to deal with a broken furnace, unexpected medical bills, or replacing that tire you blew on the highway. Accessible cash means you can keep to your debt-repayment plan and deal with whatever crisis – large or small – that has come knocking on your door.
“I can’t see the point of letting money sit earning next to nothing.” While it can be a really sad thing to watch thousands of dollars languishing in a savings account, return isn’t the priority with an emergency fund. Access is. Stick that money into the market and it may not be there just when you need it most. Stick it in a high-interest savings account and while you may be irked by the pittance you’re earning in interest, the emergency fund will be at the ready when you hit the wall. The point is to have some wiggle room when the unexpected happens.
“I have $1,000. That’s enough.” $1,000 may be enough of an emergency fund if you live under a rock. Yes, you’ll need less of a buffer if your home is paid for, you have no debt, you walk everywhere you go, and you’re happy eating ketchup soup three nights a week. If you want a realistic emergency fund – one that actually gets you though the rough – figure our your monthly essential expenses and multiply by six. That’s how much you need.
Unemployment insurance may help fill the gap if you lose your job, but it doesn’t go far. And unemployment isn’t the worst emergency you may face. Get sick and watch your money evaporate. Even if you have good health and disability insurance plans, your cash flow will still take a kicking until your benefits click on.
“Who needs an emergency fund when you can use a line of credit?” The people telling us to get an LOC is an emergency fund are the same people who let us buy houses without enough money down, offered us ways to satisfy all your whims while spending money we hadn’t yet earned, and continually raised our limits until many of us had enough debt to bury an elephant.
A line of credit is not an emergency fund… it is debt waiting to happen. If you hit a wall and end up racking up tens of thousands in debt on an LOC, how was that diverting disaster?
Perhaps the problem with the whole emergency fund thing is that people don’t like to think they’ll have to deal with “emergencies.” It’s not unlike the folks who won’t make a Will because they don’t want to contemplate their demise, or who won’t buy disability insurance because they can’t imagine becoming disabled.
Maybe we’re just calling it by the wrong name. The whole idea of having to deal with “emergencies” can be a real downer. Maybe what we need is nomenclature that sounds far more proactive and positive. We’ll stop predicting disaster and instead focus on the fact that when you have money at the ready, you also have ways and means to deal with whatever life pitches at you.
Hmmm… a Ways-and-Means Fund… cash in the bank that gives us the means so we can figure out ways of dealing with life’s lumps. Your son breaks his arm playing in the yard, and you have the means – the money – you need to take a day off work, get him to the hospital, and cope in whatever other ways you must. Your partner is downsized and you have the means to pay the mortgage and keep food on the table until he finds new ways of bringing home the bacon. You bang up your car, watch your shingles blow off in a wind-storm, or find yourself in the throes of a divorce, and you have the means to keep the financial boat afloat while you find ways to cope with all the other stress in your life.
Convinced that having The Means offers you more Ways of smoothing out life’s bumps? Now it’s just a matter of coming up with the dough. It takes effort to knead intent into action.
To best way to create your Ways-and-Means Fund is to set up an automatic deduction from your regular account to a high-interest savings account. If you don’t have much to save, it doesn’t matter — the important thing is just to start… to convert your intent into action. As long as you haven’t started, you’re not creating the means for dealing with what life will inevitably throw at you. Commit $25 per pay to your Ways-and-Means Fund. Once you’ve begun, you’re on your way and then it only becomes a matter of how to boost the amount you’re setting aside to grow your stash of cash.
Most people have expenses they can trim to boost the money going to their Ways-and-Means Fund. Do you buy coffee every day on the way to work? Calculate how much you’re spending, cut it in half, and send the difference to your Ways-and-Means Fund. Smoke? If you smoked half as much, how much would you be able to sock away? Pick up the latest magazine at the checkout counter? Subscribe to premium cable? Go out for a drink with your friends after work? Buy your lunch at work? Pick up your favorite “stuff” whenever it’s on sale even though you already have 30 pairs of shoes, white shirts, handbags, DVDs, name your vice here. How quickly could you build your Ways-and-Means Fund by focusing on being safe as opposed to being satiated?
If you’re determined to keep all your small indulgences, try the Tit-for-Tat approach to building your Ways-and-Means Fund. Each time you satisfy a WANT, contribute an equal amount to your Ways-and-Means Fund. Not only will it make you really think about whether you’re going to spend the money –in essence whatever you buy is going to cost your cash flow twice as much – you’ll be giving yourself options for the future while you enjoy yourself today.
June 10, 2009 at 6:40 am
You could also choose to call your emergency fund your “Murphy’s Fund”. For Murphy’s Law…. not my idea, got that one from Dave Ramsey. If you have a Murphy’s Fund you already have the “means for dealing with what life will inevitably throw at you”.
I’m one of those people who choose to have a smaller Murphy’s Fund while I am paying off my debt. Set around $1000.00 I add about $50.00 a month. Its enough to make me feel comfortable and it’s still growing. Having said that I do not own a home so I don’t have those expenses.
June 10, 2009 at 7:21 am
Never thought of having an emergency fund until I found Gail. Started putting money in it six months ago and was I glad to have done that when I needed not one but three root canals. Insurance only pays 80% of treatment and 50% of crowns and I ended up with a bill of about $800.00. Was I ever glad to have the money at the ready to pay it off.
I’ve seen Suze Orman a couple of times and heard her now saying that if you get cash, you shouldn’t put it all on your debt. She says that for people who don’t have ready emergency funds, they need to keep some cash so that if they pay their LOC or credit card off and the bank then cuts it back or outright cancels it, they still have access to money.
June 10, 2009 at 8:02 am
Well said, Gail! I’ve heard my friend talk about how tough it is that her spouse was laid off, and how are they going to manage. She said they don’t have money saved for an emergency because how can you save when you can barely pay the bills? On that note, I told her we no longer have satellite television – we have an antenna and get three channels. Well, she said, we pay $100 for our TV but we need it! Well, for me, that money went towards our emergency fund, and you know, I don’t miss the TV shows (internet gets most of the ones I want to see). Some people just don’t get it! I’m the type of person who can “forget” about our emergency fund and keep adding to it and not dwell on the fact that it is there. If I need to use it, I know it’s there (now to about $5,000 and climbing). I also have RRSP’s that I’ve been accumulating since I was in my teens. Would I use those? No….I know they have lost some money over the past little while, but they are my long term retirement plan. For current money use – they don’t exist.
June 10, 2009 at 8:58 am
When I paid off my house, I kept the mutual fund account that I had set up to pay my yearly house taxes. $200/month went in and I could easily forget about it because the money had always been going out and I only got quarterly statements.
I just recently stopped that account in favour of an ING account, but it was always a cushion of “found” money when something unexpected cropped up.
I think many of us that have unionized jobs with sick/dental/retirement benefits are lulled into a false sense of not needing an emergency fund.
Remember, the emergencies may happen to your adult child or your elderly parents!!
I’ve sure become more prudent since my arrival into Gail’s World.
June 10, 2009 at 9:23 am
It has taken me a while to convince my partner to use Gails system, he is still not on board for an emergency fund but we are building a planned spending account (christmas, birthdays, vacation, new tires, dog grooming) in the face of a true emergency this would easily convert into an emergency fund. We put $500 in this account monthly so it is building, I roughly estimated $5000 a year for planned spending. When we get to $5000 in the planned spending we will start building the emergency fund. (the emergency fund and my partner are a work in progress)
June 10, 2009 at 9:35 am
I have about $1000 in my e-fund now, and put $20/month into it. I have a lot of goals that I’m saving towards right now – and have troubles figuring out the priorities – that said, I’m not willing to *stop* puting money into any of my ‘funds’
June 10, 2009 at 10:05 am
I was one of those people who thought that my LOC or credit card was my emergency fund. Until I found Gail that is! Now I have no debt except for my car payment and 5 months expenses saved in my emergency fund.
I work in the Alberta oil patch and recently some friends have had their hours and therefore salaries cut (to stave off layoffs), some by 10%, one by 20%. All are worried how they will make ends meet, none have an emergency fund. I am relieved that should that happen to me, or even if I get laid off, I will be just fine.
I few weeks ago I posted on another thread that I had watched an “expert” (someone who counsels people on how to manage their money) on a local breakfast show & she said if you have debt you should work on paying it off rather than saving. WHAT!?! Listening to that kind of advice kept me from saving for an emergency fund for years, but now thanks to Gail I know better. As I was watching the show I thought if you don’t have any savings, how do you get through an emergency – more debt! Bad, bad advice!
June 10, 2009 at 10:22 am
thanks to Gail’s system I was able to accumulate in the last 6 months (all of these are on high savings account -RBC-
637.02 for Vacation (wife gets her vacation paid on every check)
565.95 for our Emergency Fund
228.81 our transportation account (everything from Gas to Oil to repairs to 407tolls and parking comes out of this one – this is money left over from the last 6 months)
335.26 our planned spending (this one is funded with all the extra money that is left over from the jars each month).
so as you can see, the system does work.
on a side note… Rogers decided to take my 15% discount on all my services, so in turn, I cancelled their home phone service (contract was up) and went to a lower internet plan. I got Vonage, now I am saving 10 bucks there, plus 10 bucks off the internet. 20 bucks more in my pocket, which I will put towards increasing my emergency fund. So as you can see, there are ways to be better off than other people (and this is no matter how much you make, but how you decide to use the money you bring into the household)…. my cable is 35 bucks, and I am getting tempted on canceling it… but we do have a baby, and my wife does watches some programs, so we are not ready to give that up just yet (although I really hate Rogers and I want to cancel it).
By the way, our mortgage is accelerated weekly, that saves you money in the long run and it does not affect your overall budgeting. We like to budget everything weekly.
Everyone: save while you pay off your debt. Some people are in doubt , but IT DOES WORK, so LISTEN TO GAIL (she really want to help us, otherwise, she would not). Save as little as you can, but save. And one more thing that REALLY works for us is the automatic transfers into the different accounts. They happen when our checks are deposited and trust me, it’s WAYYY better, less hassle. Sorry… one more thing for those who like to get points on their credit card, etc… if you have services that you can pay with your credit card, go ahead, but make sure you also make auto-transfers from your account to the credit card so that they are always paid off.
June 10, 2009 at 10:26 am
forgot to say… Gail, I love you and I thank you for all the advise you give and share… not too many people would do that (your are my secret lover, shhh don’t tell my wife)
June 10, 2009 at 10:51 am
we started small. very small. $5 bucks a week. didn’t even notice that money going into the EF. i set up 10 automatic transfers…when that was finished we did $8 a week…..now we are up to $20 a week going into our EF and we have started ‘planned spending’ saving. We have a healthy holiday fund and have started a house repair/maintenance fund and car maintenance/repair fund. we started small…obviously (it’s what we do best)…$1 a week into those funds (and any money i make from crafting and doing online surveys)…then it’ll be more after 10 weeks.
slow but sure.
June 10, 2009 at 10:55 am
Face it – we are a society of spenders, not savers. We want it all and we want it right now. Tomorrow can look after itself. It is live for today and immediate gratification. Talk about a lack of impulse control. Just look around and you will see concrete examples of how we don’t have any impulse control whatsoever.
Ah Denial. Denial is a great defense mechanism. It allows you to blindly justify your current lifestyle and decisions without a second thought for the whatifs. What if you have a car accident? What if your partner gets sick? What if you get laid off? What if you get a crappy boss and cannot work? What if there is a storm and your roof caves in? What if there is a fire and your condo is burned out? What if interest rates go up? What if your aging parents can no longer look after themselves and ask for your help? The fact is that bad things happen to good people. It’s called life.
Here is what some people have found out much too late. That attempt to save money wherever possible means that their auto insurance won’t cover the total cost of the accident and they are now looking at thousands in out of pocket expenses. That disability insurance your partner has through work only pays 70% of income, is taxable, and takes an average of 3-6 months to get approved. That job security that you thought you had means you have to take a job for the worst boss ever resulting in your having to take stress leave and apply for disability insurance. That fire in your condo means you will need to find another place to live for 6-12 months while the condo board goes through the tendering process and finally gets around to getting your place repaired. You have to pay rent on your temporary digs and still pay your mortgage and all fees for that condo that you cannot live in. Your parents do not want to leave their house so they ask you to pitch in with an extra $1000 – $2000 a month for home support help.
My sister is 46 and is overwhelmed with the number of her friends and colleagues who are being diagnosed with serious health issues. As a Occupational Health & Safety Advisor, I know that this is the norm; there is a high probability that you will be disabled in your lifetime. Yet we refuse to plan for it.
Perhaps we are thinking like the big business – if anything bad happens there will always be a bail out? If anyone knows of such a bail out, please email me and let me know. I haven’t been able to find one yet.
June 10, 2009 at 12:25 pm
We could call it the *** FREEDOM FUND *** !
I know that word is a little over used by our neighbours to the South, but bare with me….
It gives freedom from that nigging “what if” stress.
It gives freedom from your line of credit for emergencies.
It gives freedom for opportunities that aren’t available when you are “broke”.
It gives freedom to diversify the investments when there is enough in the EF to think of that.
It gives the freedom to get out of a bad situation (relationship/job/living arrangement) and not be hog-tied to anyone or anything financially!
Of course with freedom comes responsibility, but that’s another story!
How I built my FREEDOM FUND quickly……
Along with automatically tucking a small amount away every pay period, I figured out what the “float” of my life needs to be (the minimum amount needed to get everything paid including life), and everything over and above my float I take about 30 secondls transfering into my HI savings account online.
It’s very easy to do!
Sometimes I undercalculate (life is more expensive that month) so I have to consider transfering some back to the checking. I am allowed only one withdraw per month on the HI without penalty so I have to think very hard if I can squeek by without it first! The funny thing is I usually can — so the money in the HI savings grows!!!!!
Once the money is in there I really don’t want to take it out, somehow it’s much easier than my old way of looking at the checking and deciding how much I can afford to put in the savings.
There was an added bonus: It keeps hubby from doing too much impulse buying too. He sees the balance available to his bank card and decides NOT to get stuff. He always comes home to tell me about the deal he saw, but we get to decide together whether it’s worth taking that out of the savings. Having that extra step to get to it really helps us.
June 10, 2009 at 12:54 pm
My husband really does not like calling our emergency fund the emergency fund. He thinks it sounds too pessimistic. Personally I think that it is called the emergency fund because that is what it is – it is there for emergencies.
But then again a rose etc, etc. He suggested that we call it the Safety Net. If we fall we won’t hit hard because we will have a soft place to land. Yeah, but then what? Stuck at the bottom flopping around? To me that does not sound all that optimistic. I prefer the Bungee Fund. If we fall we will go for a wild ride but spring right back up again.
June 10, 2009 at 2:01 pm
The EF is certainly getting a workout right now…i check the balance every day and plenty is being dispensed.
My husband’s layoff has been great so far though…the outdoor trim is being painted as i write, i haven’t had to shuttle both teens and their team mates everywhere, every night AND supper is already made when i get home and the dishes are done!!! i live the life of leisure…lol
A couple of years ago, pre-EF, i would have been a wreck. Our line of credit was our EF then. Obviously our saved cash is not limitless, and we will have to work extra hard to build it back up but for now, i am enjoying having my darling home all day. The chore list is actually diminishing!!! i wonder if he would be amused if i graphed the correlation between EF decrease and ‘honey-do’ completions…hhhmm
For us the inconvenience of cooking at home, deferring the anniversary cruise and saying no once in a while to the children has been replaced with Peace of Mind. Everyday we make a point of letting the kiddos know how thankful we are that we all chose to make this responsible decision…Gail you are even toasted with the occasional glass of milk at the dinner table.
June 10, 2009 at 3:34 pm
I like the name ‘Freedom Fund’ but I also like
‘OMG, I have the money to pay this bill fund!
‘Jaw Dropping in Amazement Fund’
‘Eyes Wide Open Fund’
or much like Gail’s ‘Ways and Means Fund – ‘If there is a will, there is a way fund’
Thanks for making me smile today!
June 10, 2009 at 4:48 pm
MadMommaP gets my vote with the Peace of Mind Fund!
OR the I Sleep Soundly At Night Fund!
June 10, 2009 at 6:40 pm
Hi Dinah
I had a question, I was looking for any online paid surveys sites n it seems they all ask u for money upfront. How did u get started? Would appreciate any advise/help you cld offer. Am shifting to nights at my work so I can get more(approx 32) hours/week n would like to make some extra money during the day to pay down our debt n start some savings as well.
Thanks so much.
June 10, 2009 at 7:23 pm
I have and always have had an emergency fund…BUT…when the time came that we really really needed it…(serious illness for my husband and NO benefits from his job and NO chance of returning to ANY type of employment) that E.F. became the ‘booster’ fund…if we knew he was going back to work after say 3 – 4 months we would have just sailed along paying what had to be paid and so forth, instead we had to get him E.I. benefits for sickness (12 weeks is the max) and we also had to apply for the C.P.P. disability benefit…since there is no time line to an approval for cpp (and you do have to be “approved” via ALOT of medical documentation) there was really no way to judge just how long this emergency fund needed to last…so we cut our spending to agree with the E.I. benefits and THEN we used the emerg fund and thankfully he was approved BEFORE the e.f. ran out…thank goodness we had the forsight to reduce as if that E.F. wasn’t even there so that we could make it last longer…it took months to get insurances to pay what they said they would pay if we needed it…they all came through in the end but again it all required waiting periods and then endless reams of medical documentation…thank GOD my husband has a doctor who actually realizes just how important that paperwork is and completed it all in a timely manner…after 7 months of little to no income we were back paid and in receipt of regular monthly benefits (plus I was able to get a full time job within 4 months) moral of the story…plan ahead…have an emergency fund…make sure you have adequate insurance coverage and never take for granted your health or job security…we are living proof on how easily you can get blindsighted but also living proof on how you can make it through and recover:)
June 10, 2009 at 7:44 pm
I prefer the “I got it covered” account.
June 10, 2009 at 7:47 pm
U can call it by any name that makes u comfortable but in the end its the fund that has you covered.
June 10, 2009 at 8:12 pm
Like a lot of people we are starting our savings small…$80/mo with an opening balance of $100.
In five years, we’ll have over five thousand dollars in that account without counting the tax returns we plan on putting in there or the increases we intend to make when my husband gets his next raise and when our credit cards are paid off (six months to go!!)
You don’t have to save crazy amounts right off the bat. Start big or start small, just START SOMEWHERE.
June 10, 2009 at 8:36 pm
Gail how do you possibly manage to write so much valuable stuff, always with new and interesting discussions on the same concept… thank you for all that you do here. And remember everyone, a bit birthday is coming up real soon!
June 10, 2009 at 8:59 pm
Thanks for the reminder about June 18 Marcie!!
June 10, 2009 at 10:20 pm
oops- that was supposed to say “a big birthday!”
June 11, 2009 at 9:18 am
@ geeta – i do surveys with pineconeresear(dot)com. i’ve signed up for some others but they seem like scams. pinecone is tough to get into. you have to get referred (i think) and they only take new people every once in a while. i probably get about $10 bucks a month from them. not much…but every little bit helps.
June 11, 2009 at 11:04 am
Hi Everyone,
I started an EM fund last fall and glad I had it when I my vehicle needed tons of repairs 5 months ago.
I was dissapointed that the EM fund came and went faster than you can say “You need a new starter and 4 tires”, but I was happy I had it. The old me would of slapped the $2,700 on my credit card and slowly paid it off.
I am convinced that an EM fund is functional and essential for everyone.
The EM fund now is at $2,000 and slowly grows every 2 weeks. Hopefully it can be sustained until I receive the “You need new brakes” phone call!!!
June 11, 2009 at 11:14 am
I can’t say enough about the benefits of readily available cash. Over my years of working life I had accumulated enough cash to cover a year of expenses (separate from my investments). In 2007 after having problems getting along with my manager I decided to look for other work. I received an offer from a company for more pay in a big city (which is where I wanted to be). My manager found out about the offer (I hadn’t accepted it yet) and used the excuse to immediately fired me.
The company tried to gloss over the wrongful dismissal with a paltry four months of salary. I remember the HR person pushing me to sign my consent to the payout. She kept saying: “I’m sure this is hard for you to not be receiving a paycheck”. Sorry lady – I had a year of salary in the bank and a job offer in my back pocket. I was doing just fine.
I refused to sign the paperwork and told them I would be in touch after speaking with a lawyer. I paid $250 for a law student to call them to arrange a face to face meeting and suddenly the company came up with a full twelve months of salary as compensation. I took it and started my new and fantastic job the next day.
An emergency fund is freedom! Happy saving everyone!
June 11, 2009 at 6:54 pm
Thanks, Dinah. I’ll look into it.
June 16, 2009 at 10:41 am
We had not been saving for an emergency fund. We had some extra funds in our chequing account that just got wiped out to pay the tax man but nothing was specifically set aside.
We were focusing on paying off our truck and adding to our 401k. With a 50% match on our 401k it was very enticing to sock our money into that rather than more accessible savings. Well the company has had a layoff and has temporarily suspended their match for 3 months. I reduced our 401k contribution to 1% of my pay and the rest of it is going into a savings account. Without a match, not so enticing to stick it in there so we have switched our priorities until the match comes back. We should be able to save several 1000$ before the match is reinstated so this will get us a good start on our fund.
July 10, 2009 at 6:21 am
[...] Ways and Means of Coping with an Emergency « gailvazoxlade.com [...]
July 20, 2009 at 8:20 am
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.
July 29, 2009 at 8:25 am
[...] Ways and Means of Coping with an Emergency « gailvazoxlade.com [...]
August 11, 2009 at 5:53 am
[...] Ways and Means of Coping with an Emergency « gailvazoxlade.com [...]
August 28, 2009 at 6:29 am
[...] Ways and Means of Coping with an Emergency « gailvazoxlade.com [...]
August 30, 2009 at 5:36 am
[...] Ways and Means of Coping with an Emergency « gailvazoxlade.com [...]
December 19, 2009 at 6:31 pm
@DanielC- EI benefits don’t kick in until 2 weeks or so after your application is recieved, and you would only be given a certain amount of weeks, depnding on your file, so that would probably affect your calculations. If it was me, I wouldn’t include it, then the emergency fund would stretch farther in the case you have a harder time getting back to work than expected.