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Why you need an emergency budget

Money experts have long recommended emergency funds, a money buffer to allow for the unexpected to happen, as one of the most important keys to a healthy money life. This money practice is important, but you also need an emergency budget, a plan to go along with your savings to be best prepared when a crisis strikes.

What happens to your hard-earned savings when an emergency arises and you need to dip into those funds? How do you know how long your money will last? What should you spend it on and what should you stop spending on?

In the middle of a crisis, no one is the best at managing their money. We spend emotionally. We panic. We don’t have the stability and guidelines that our budgets normally provide us.

The Emergency Budget

– your new favorite tool for peace of mind –

Building one is simple and does something that can’t be bought.  It lets you know exactly how much money you need to live off in an emergency situation.

Our regular monthly budgets account for a lot of things: paying bills, putting money in savings, debt repayment (for some), sinking funds, eating out, etc. In an emergency, many of those things won’t have a place in your budget anymore.

By creating an emergency budget NOW, you’ll know the amount of money you really need to survive the month with a roof over your head, clothes on your back and food in your belly.

saving money for emergency

Creating An Emergency Budget

1. Make a copy of your regular monthly budget.

Go through it line by line and cut anything that isn’t absolutely necessary to survival. Rent, electricity, food, car payments, insurance and gas all get to stay. Savings, restaurants, entertainment and “fun” money should all go. Be ruthless.  Read how to make a budget.

2. Add in lines for emergency expenses

Include things that could come up in an emergency situation. If your job covers your family’s medical insurance, COBRA could be a necessary added expense in the case of a job loss. If the potential emergency issue is medical, an increased child care budget may be a need.

3. Total your budget

Fully total your budget out and save it as “My emergency budget.” Put it somewhere safe and update it annually or as your financial situation changes.


You should now have an approximate number of how much money you need for one month. This “bare bones” budget can be used to see how much money you want to save for your fully funded emergency fund or to see how many months your current savings will last.

That number will also give you an idea of how little you need to be bringing in to survive. It is likely much less than your current income and will give you some peace of mind knowing that number when facing a potentially long-term emergency situation.

Doing this now allows hard decisions to be made with a clear head, versus later when you’re in crisis mode.  Armed with an emergency fund and an emergency budget, you will be much better equipped to weather any financial storm.

Your Turn!

  • Do you have an emergency budget in place?
  • Have you ever had an emergency impact your budget?

Save

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Protect Your Wealth

You’ve worked hard and have been financially responsible. You’ve lived on less than you’ve made and saved those extra dollars. Let’s safeguard what you’ve built and look at four things that you can do to protect your wealth.

protecting wealth

Make sure you have the proper insurance in place:

Having proper insurance in place plays a critical role in protecting your wealth in the event of the unexpected. You want to make sure that you regularly review your health, homeowners, and auto insurance to ensure that you have the proper protection that is needed.

You also don’t want to forget to insure yourself and your family against any possible loss of income that may occur. Although not pleasant to think about, having a proper amount of life insurance is necessary in protecting your family’s financial picture.

Most experts recommend having enough life insurance to cover 10 times your annual income. This ensures that your family will be taken care of in the event of your death. My husband and I each have 20-year term insurance. We get the coverage we need, at a price we can afford.disability insurance

If your employer does not already offer it, you may also want to look into disability insurance so that an illness or injury will not destroy the savings that you’ve worked hard to build. Disability insurance will not replace your income, but it will provide a buffer, paying out 60% of what you would normally be making.

It might not seem likely that this type of insurance is something that you would need, but the Social Security Administration estimates that one in four 20-year olds will become disabled and be unable to work before the age of 67, so it’s better to be safe than sorry and make sure that you’re protected.

Have an emergency fund:

Setting aside 3-6 months of your living expenses will serve as insurance for the wealth that you have built and are continuing to build. The money is there when you truly need it, without having to go into debt or withdraw from your retirement savings.

We often think of our emergency fund in the case of job loss. Another good use for your emergency fund is to use it for any home, auto, or medical insurance deductible. We have enough to cover all of our deductibles. This meant that we could raise the deductibles on our various insurance policies and thus lower the premium payments freeing up some extra money each month.

Have an estate plan:

I have many friends who have avoided this step, because planning for your death is not the most glamorous of topics, but having a current will in place is a critical step in your financial plan.

Your estate plan will allow you to reduce administrative expenses and legal fees upon your death. It will also mean that you preserve and leave a lasting legacy for your loved ones. Finally, your will allows you to control, manage, and allocate who receives your assets upon your death.

estate planning

Name your designated beneficiaries:

As important as it is to have a current will in place, it is equally important to name your designated beneficiaries to ensure that your assets are distributed according to your wishes. Be sure to name beneficiaries on any assets that will allow it such as your life insurance, pension plan, IRAs, or 401 (k)s.

Your Turn!

  • What steps have you taken to protect your wealth?

How to Build Your Emergency Fund

Everyone needs an emergency fund. Life is going to happen, and those unexpected expenses can sometimes come with some serious sticker shock.The emergency fund provides that buffer between you and life, and prevents you from incurring debt when a true emergency arises.

emergency fund

When life throws you a financial curve ball, the emergency fund will turn what would otherwise be a crisis that has you running for your credit card, into an inconvenience that has you writing a check. Let’s look at the four steps you can take to help you start to build your fully funded emergency fund.

1. Open an account that’s accessible, but not too accessible:

When an emergency occurs you want to make sure that you can easily access the funds, but not have them so accessible that you accidentally spend the money on items that are not emergencies. Consider opening up a separate savings account that is not attached to your debit card. We have ours in a higher interest rate savings account where the money can be transferred into our checking account within 24 hours.

emergency fund

Remember though, your emergency fund is insurance rather than an investment. We’re not looking to make big returns on the money that is sitting in this account. If you make some interest (I think we earn $5 a month), that’s fine, but earning money is not the intention. The intention of this money is to protect the rest of your finances – including any investments.

2. Determine what 3 to 6 months of living expenses are:

Most financial experts agree that a fully funded emergency fund should contain 3 to 6 months of living expenses. In order to determine this amount, go back to your budget and look at the essential expenses that you would need to calculating living expensescover in order to get through each month. Add up your housing costs, transportation costs, monthly grocery budget, and any other monthly fixed expenses that you would still be obligated to make (insurance premiums, etc).

In order to determine whether you should be closer to the three or six month savings mark, you also have to factor your risks. If your job is stable and you are in good health or if you have disability coverage through work if you were to become ill, you could consider keeping your savings closer to the three month mark. If you are self-employed or have a variable income, you would want to set your savings goal closer to the 6 month mark.

3. Set aside a savings goal in your monthly budget:

When you add up the amount to save, it might seem overwhelming at first, but don’t let that stop you from working towards this goal. Start small with a starter emergency fund and once you get all of your debts paid off (minus your mortgage), then you can focus on building that emergency fund by taking what you were putting towards debt and now putting it into savings.

spare change

Each month when you make your budget, look at the money you have left over and commit a certain amount of it to your emergency fund until it is fully funded. The more you are able to set aside for your emergency fund, the faster you will hit your goal amount.

4. Only use the money for emergencies:

The best way to make sure that you are building your emergency fund is to only use the money in that account for actual emergencies. So what constitutes an emergency? Any major expense that you couldn’t have anticipated, such as:

  • An unexpected job loss
  • A medical emergency
  • A sudden, major car repair
  • A leaking roof during a storm

What doesn’t count as an emergency are those expenses that we should have anticipated and been planning for already. Christmas, annual insurance premiums, and regular car maintenance are not emergencies so be sure to plan for these somewhere else in your budget.

Our emergency fund has saved us in a couple of occasions over the last three years and turned those “emergencies” into much less stressful inconveniences. When it was not only raining outside during a particularly heavy storm, but also raining inside, we had the money to be able to put on a new roof. More recently when our minivan, and main form of transportation, decided to pack it in, we were able to use some of the funds from our emergency fund to purchase a new to us car with cash.

If you’re lucky, you’ll be able to leave your emergency fund sitting untouched, but if the time arises, you’ll be glad that it is there.

Your Turn!

  • What has life thrown your way that either made you glad you had, or wished you had, the extra funds available?

Establishing Your Emergency Fund

Our first step to getting our financial act together was to establish our emergency fund. We had no intention of fully funding it before we paid off our debt, but we knew that we needed a little bit of a cushion between us and life so that we could avoid going further into debt as we paid off what we already had.

Setting up a Starter Emergency Fund

Emergency Fund

Why should I have money in the bank when I’m trying to pay off debt?

Having money set aside in the bank will allow you the chance to continue to work towards your financial goals in case the unforeseen happens. Money in the bank takes the stress away if you face an unexpected car repair or medical expense. You’ll feel relief knowing that you are prepared for a little bit of life to happen while you continue to pay off your debt.

Where should I keep my emergency fund?

You want to make sure that your emergency fund is accessible without being too accessible, that way a take out pizza or a new pair of shoes don’t become an “emergency”. We have ours in a savings account that is accessible online but not with my debit card. Within 24 hours I can have the money transferred to my checking account if an emergency was to occur.

emergency fund

How much should I have set aside?

Keep in mind that your starter emergency fund is not your fully funded emergency fund. While you’re focused on getting out of debt, you want to set aside an amount that would cover most minor emergencies. For our family of four, that meant having $1000 set aside. You may not need that much if you’re single with fewer expenses, while some might feel comfortable with having $2000 or $3000 in savings.

When should I start my emergency fund? garage sale

As soon as you possible, you can never be too prepared. If you already have savings in the bank, it’s as simple as earmarking that money as your emergency savings. No money? No problem. It’s time to look around the house and start selling stuff online or gather up your goods and plan a garage sale. Perhaps you can pick up some extra hours at work or pick up some extra work. Don’t forget to take a look at that budget and see where you can squeeze to save up the money.

With any luck you won’t need to use your emergency fund, but what a feeling of relief it is to know that if life does happen, you’ll feel be for it. Your emergency fund, although just a starter one for now, will bring your one step closer to building your own personal freedom.

 

Your Turn!

  • What does financial freedom mean to you?

 

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