Are You Prepared for the Unexpected?
Read time: 4 minutes.
Welcome to the Friday FinTips newsletter, where I provide tips to simplify how you manage money.
If you’re like basically any human that ever existed, chances are you’ve run into some situations that require significant sums of cash in a short amount of time. And I’m not talking about paying a $25 delivery fee at 1am to get that chocolate chip cookie delivered to your door.
I’m talking about that car accident, when your washer broke, or the harsh reality of getting laid off. Let’s chat about how you can prepare for them now, because something WILL happen in your future where you’ll need cash quickly.
Set up an emergency fund
Aim for 3-6 months of “Needs.” By that, I mean things you would absolutely have to pay for even if you weren’t working. If you're worried about a particular financial situation (like getting laid off), then aim for more than 6 months.
If you’re using a Friday FinTips budget, getting this number is easy. It’s calculated for you in the Needs section. If you’re not, take a few minutes to calculate it. Add up all mandatory expenses (things you can’t eliminate) and then multiply it by 3-6 months (depending on how much you want in your emergency fund).
Put the money aside
So now you know how much you need to set aside, but how do you do it? Like all things related to money management…a little at a time. Take a look at your budget and see if you can set aside some cash each month to your emergency fund. If you get some extra cash (like a bonus or maybe your wife found $5 in her pants that she hasn’t worn in months but still wants to keep), consider putting a portion of it toward your emergency fund.
About a year ago I was worried about getting laid off, so we prioritized building a bigger emergency fund and sacrificed some other savings goals. We still went out and enjoyed our lives, but we just delayed our timeline on certain things (like that new couch…which I really want because ours is just too small and not that comfy.)
When to use your emergency money
Short answer: as little as possible!
Long answer: When life happens and you get surprise bills, try your best NOT to dip into your emergency bucket and use one of your existing buckets instead. We recently had a medical bill that wasn’t part of our budget. Rather than taking it out of the emergency bucket, we just spent less on adventures.
If you don’t have enough in your regular budget to put towards the “surprise bill”, then it’s time to dip into your emergency fund. That’s what it’s there for, but you don’t want to get into the habit of always using it.
Why not just use credit cards?
You could…if you know with 100% certainty you’ll pay them off (in full) when the bill comes in. The problem is you may NOT have the cash to pay off the bill because it was a surprise expense. Then, you’re stuck with this looming credit card debt for months (or years). That $600 surprise expense suddenly becomes $1,000 (or more) when you add in interest.
Try to avoid using credit cards for your emergency expenses unless you’ve already set aside the cash to pay them off.
If this is the first time you’re starting an Emergency Fund, I’d recommend just starting with saving $1,000 as quickly as you can. Once you’ve done that, try the steps below.
Calculate how much you spend on “Needs” in a given month (AKA your mandatory expenses). If you use the Friday FinTips budget, it’ll show you.
Figure out how many months you want in your Emergency Fund (usually 3-6).
Look at your budget and see how much you can save each month to get to that goal.
That's all for this week. Enjoy your weekend.