Are You Emergency Prone?
Posted by Gail | Filed under When Ca-Ca Happens
When The Spurts tell you that you need an emergency fund, they’re suggesting that you set aside some money just in case something really big comes along to through you off your well-laid financial path. We’re talking a loss of job. We’re talking an illness that has you sidelined for a few months or longer. We’re talking major unpredictable events.
Over and over I meet people who are battered by emergencies. Their tires need to be replaced. Couldn’t see that coming, right? Their 15-year-old microwave gives up the ghost. Totally out of the blue, eh? Their roof is leaking. Gosh, you mean a roof has a life expectancy too?
Most of the emergencies people site are actually events that could be predicted and planned for, with a little insight and a willingness to set some money aside for a planned expense. Truth is, most people would rather spend the money NOW! So they close their eyes to the inevitable arrival of an “unforeseen expense”, and then claim it’s an emergency.
Then there are the folks who turn their little “emergencies” into big expenses. Sure your fridge isn’t working and you need a new one. Might as well upgrade if we are getting another one. But heading out to find a shiny stainless-steel job where a less expensive fridge would do without having the money set aside isn’t an emergency, it’s an excuse to go shopping on credit. Now you’ve turned your small NEED into a big ol’ WANT and you can’t wait to scratch your itch.
People love NEW. And they love BIGGER too. They are loath to look for the less-expensive way to do things when the “emergency” has supplied them with the perfect excuse blow a wad of cash credit. When my air-conditioning in my car went recently, I headed to my local car doctor to figure out the problem. He replaced my freon, which promptly re-evaporated. He could replace the whole system or cap the sucker before the leak but I’d only have air in the front of the van. Cost difference? About $1,000. I said, “Cap the sucker!”
Sometimes the fix makes more sense in the grander scheme of things. Yes there are times why buying new is the right solution, but it isn’t in an “emergency,” it’s when you’ve made a plan to replace whatever it is you need, done your research and saved the money you’ll have to spend.
It makes no sense to label every financial setback an “emergency” and then panic as you search for the quickest solution. Panic leads to irrational acts. Irrational acts are expensive. It makes far more sense to look at your stuff and think about it in the context of when it will likely need to be replaced. I know I’ll need another car in about 150,000 or so kilometers. So I’ll make allowance for that in my planning. If it comes a little sooner than I expect, I’ll still be well on my way to my planned spending. If it comes a little later, all that extra time is gravy!
If you find you just can’t get ahead of all the little “emergencies” that keep cropping up in your life, you need to build a “contingency” fund into your budget. This is a good alternative for people who just can’t seem to plan ahead. Hey, you are who you are and it’s better to accept your shortcomings as a planner and have an alternative than continue to be jolted by surprises. Setting aside some money to deal with the unexpected will not only give you the wiggle room in your budget, it’ll stop you tapping your emergency fund. Now you have a way to deal with all the unexpected expenses that keep cropping up in your life while you continue to build a safety net for the really big caca that may come along.
Your emergency fund is meant to hold you through the toughest of times, not scratch every replacement itch you get. Leave it alone so it can grow. In the mean time, take an inventory of what you have and when it’s likely to expire. Start planning to eliminate all the “emergencies” that have been draining your just-in-case fund.
BTW: While I do not give suggestions on where you can invest your money, people continue to ask. I suggest you check our today’s blog by Canadian Capitalist in which CC gives his pick of the top 5 investment deals going.
August 31, 2009 at 8:39 am
Great post Gail! When I’ve read that people who needed a new tire considered it an “emergency”, I’ve thought, “Shouldn’t that be in your Car Maintenance fund?” It is amazing when you set aside money for various things, like an Emergency fund, Car Maintenance, etc., how you don’t even “miss” the money. On our pay day, automatic deductions from our account go straight to our various funds accounts, and then we know it’s accounted for. Nice to go to the accounts and see the totals rising. Also nice to be able to sleep at night knowing that if a true emergency happened, panic wouldn’t have to set in.
August 31, 2009 at 9:03 am
Planned spending account has been our saving grace! Our car (that sat unused for 2 years) cost us $2500 to get it back on the road. Without our planned spending account, that would’ve put us back into red. But instead, we have the money saved up and used the credit card only for points and paid it pronto.
August 31, 2009 at 9:56 am
i have an emergency fund going, mostly for replacing items, not car or home related. My microwave is 26 yrs old and still kicking. My brother is on his 3rd one since 1998. Go figure. Sometimes things last and sometimes they don’t.
August 31, 2009 at 10:46 am
The “sleep at night” factor mentioned by Brenda is also huge. Roof leaking? With an emergency fund, at least the financial angle is covered and there is one less thing to worry about.
Thanks for the mention Gail.
August 31, 2009 at 10:49 am
Interesting post. I commented on another blog a while back where the couple used their emergency fund for a dishwasher. Choosing to replace the dishwasher is not a bad decision (their kitchen was tiny and awkward) but I thought they should be honest with themselves that they were using their emergency fund for a non-emergency. Dishwashers may be important to us but they are not essentials. We need to get clear on the distinction – needs vs wants. They should have had money in the dishwasher in a planned spending account.
While I agree with Gail that often people upgrade when they don’t have to, it’s important to do the math when you make any big purchase. Will a temporary solution be more costly in the long run if X requires ongoing maintenance, whereas a new one will last you for years to come with no expenses? Sometimes buying new really is the more affordable purchase.
Case in point – my car just broke down and required about $4000 of repairs to just get it back on the road. Knowing that it’s an old car that is only going to continue to cost me in repairs and all its gas guzzling glory, and would need to be replaced soon anyway, I made the decision to replace it. It would have cost less to just fix it, but over all I did the math and realized it would cost less to replace it now than later.
I think the point is to do the math, with any purchase, and be rational and logical and precise about it, instead of going out and spending whatever you want – or making assumptions about what will cost less or more.
August 31, 2009 at 12:37 pm
If you follow Gail’s basic budget plan she recommends 10% for savings and 15% for debt repayment. Once you have paid off all your debts you will end up with 15% of your net income left over which you can use to bump up your emergency, savings and planned spending fund. We use 10% for emergencies which we place in 2 categories – a years worth of monthly expenses and real emergencies. We use 10% for retirement savings – have a lot to catch up on because we lived without any plan and with debt for so long – and 5% goes into planned spending which is for things like when the dishwasher is ready to expire from exhaustion and for vacations for when we are ready to expire from exhaustion.
On our budget sheet we also put money aside for house repair and maintenance, care r&p, veterinary and medical/dental.
I used to keep all the money(except for the emergency funds and retirement savings) in our chequing account but eventually it added up to a lot of money not earning any interest. Now I transfer all the extra money every month to our ING savings account and/or tax free savings accounts – this includes the money for income tax, property tax, house insurance and car insurance because we only have to pay them once a year, the planned spending fund and all but $200 in each of the house repair and maintenance, care r&p, veterinary and medical/dental funds.
Like Gail I keep track on an excel spread sheet and cannot believe how things are beginning to add up. And how relaxing it is to know the money to pay what has to be paid is there, ready and waiting. It takes me less time now to do ALL our monthly finances than it used to take me to run around moving money from one credit card/line to the other just trying to find the money to pay for one basic living expense never mind our debts.
On the weekend we went through our finances and added up our money and both of us started to giggle. I said I feel like I have become my Mom. My husband said – seven years ago would you ever have imagined that we would have money in the bank and no debt? NEVER. EVER.
Which just goes to show it can be done even by complete money nincompoops. All it takes is reaching spill over – when you no longer have any cash, credit or good will left to plug the holes in your finances – a major emergency and a disaster or two to smack you on the head and bring you to your knees, time, patience, the determination not to buy anything on credit anymore ever and a simple common sense budget plan to follow. Thank you, thank you Gail.
September 1, 2009 at 3:55 pm
Thanks for this blog Gail. I had an emergency fund, and I was thinking of using it for house repairs etc. I find it difficult to keep track of too many accounts. So now I have just created 2 separate accounts: “Rainy Day Savings” and “Maintenance Savings” which is for all things necessary for the house, the cars and any medical or dental.
September 4, 2009 at 12:31 am
I am not fond of too many accounts either.
I have the long-term savings (RRSPs) and the shorter-term savings (high interest savings account). Basically the shorter term savings is for maintenance and emergencies.
Example: I KNOW our car will need to be replaced by Spring as it is terminally rusty and has over 400,000 kms on it, but it still runs GREAT and we keep it safely maintained, so we are alotting a certain amount of the short-term fund for that big expense.
We also had to replace our truck already this Summer, but we saved up $10G for it and found one that will do the job for $3500! Of course it needs repairs (some major) but we will still be WAY ahead of the game so our car budget can be better. Trust me, buying a car with CASH is a great feeling! The trick was to just put the equivalent of a small car-payment away every month and in no time we saved up enough to ’say no’ to a car loan’s interest! We have almost always owned used cars, and knew our older vehicles weren’t going to last forever so we had years to save and prepare for the inevitable. And by taking our sweet time looking, we have had enough time to find the right vehicle at the right price — there is no urgency!
Of course if the hot water tank blows before the warrantee is up, or the roof loses shingles to a storn before it’s time, we may have to get a cheaper car…. all part of the dance called the money shuffle. (NOT the credit shuffle!)