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