How to Create an Emergency Budget (and Why You Need One)

Posted on by

You’ve probably heard of the contingency fund. It’s a little savings cushion that will help you stay afloat in the event of a financial crisis. For some emergencies, it also helps you use an emergency budget- a deflated spending plan to make sure the money in your fund lasts as long as possible.

Most experts say that you should have a living expenses of 3 to 6 months in a contingency fund. Some emergencies are small. For example, repairing a $ 500 car should be just a small waste of your fund . But there are also more serious emergencies, such as job loss. Your emergency fund is designed to help you survive for a while in these situations, and you want it to last as long as possible since you do not have a steady source of income. This is where the emergency budget comes in.

When you live off your emergency fund, you want your living expenses to be as low as possible. It won’t be a fun budget, but you’ll be happy to have it in your back pocket. This will keep your safety net in place for as long as possible.

Start with your current budget

To create your emergency budget, you will be comparing it to your current budget, so it is important that all of your expenses are factored in and updated.

We will assume that you know Budget 101 and have set a baseline budget . Your emergency budget will be based on this budget.

We also assume that you have a contingency fund (because you need one!). Some people have high enough net worth and many stable sources of income that they don’t even use an emergency fund . In this case, the emergency budget may not be so useful to them. This is mainly for those of us who would really depend on our emergency fund during the financial crisis.

First, review your current budget and all of its categories. Your budget can be listed in a spreadsheet or in an online tool like Mint . Either way, pick it up and check your main spending categories. Make sure they are up to date. Also, look at your irregular expenses – quarterly insurance payments, estimated taxes, annual fees – these should be factored into your budget if they haven’t already.

You can create your emergency budget in a spreadsheet, on paper – in any medium you like. When I formed my emergency budget, I just set up my categories in Mint.

Get rid of unnecessary

Now that your categories are in front of you, the first thing you want to look at is inconsequential costs.

Wants, discretionaries, to spend money on – whatever you call these expenses, the plan is the same: you don’t need to cut the material. Take a look at anything that isn’t an absolute necessity in your budget, and then get rid of it. For me, these categories included personal care, restaurants, and shopping. This meant there were no haircuts, no happy hours, no new toys in emergency mode.

Okay, yes, budgets need some fun. As with dieting, if you make them too strict, chances are you won’t stick to them for long. But the emergency budget isn’t long term. It is simply designed to keep you afloat during the financial crisis. So don’t be afraid to cut things out – this is temporary.

That being said, there are a few caveats to rule out anything irrelevant.

First, think about the cost of giving up luxury. For example, you have a cable. You want to get rid of it now that you are in an emergency, but after your financial situation stabilizes, you plan to get the cable again. In this case, you should think about the cost of re-installing your box, transferring the old one to the return location, finding the same deal, etc. This does not mean that you should not curtail this luxury – if you are really hard it is not the best idea to spend. money for the cable. But this may only depend on the severity of your emergency. If you have good reason to believe that you will be back on your feet soon, think about the time, cost, and effort to give up something in order to bring it back later.

Plus, you know your spending habits and the details of your emergency. Maybe you feel comfortable storing a few irrelevant items. You may have a place to add a few of them back, depending on your situation. But first, you have to see how much you work when your budget is slashed. Removing the irrelevant is the first part of this process.

Reassess your financial goals

Long-term savings should not be neglected. It is important to make regular contributions to retirement and you want to keep up with your debt goals. But during an emergency, these goals need to be reconsidered. Why? Because if you have no money, you are using your emergency fund to pay for these purposes. Do you want to keep paying off your debts or saving for retirement? Or do you want to use as little money from your emergency fund as possible? Your answer will affect your emergency budget.

Basically, you will need to decide if you need to:

  1. Keep track of your goals and replenish your emergency fund later, or;
  2. Reduce your savings / debt goals or set them aside until your income recovers.

If you choose option 1, you will simply stick to your goals and add them to your emergency budget. If you choose option 2, simply adjust your emergency budget accordingly.

When it comes to saving goals, it probably makes sense to postpone them while you’re in emergency mode. But debt goals are a little trickier as you accumulate interest. To help you decide what to do with your debt emergency goals, listen to expert advice on emergency remedies and debt repayment.

Some say that it is better to forget about an adequate reserve fund and first go into debt at high interest rates. If you agree, you may want to consider keeping your debt repayment goals unchanged, even if that means spending out of your emergency fund a little faster. For example, here’s what you need for a budget (YNAB) :

When deciding how to make the best use of available cash (including buffer money, new income, and even recurring expenses), look through the prism of “new interest expense risk”. Existing debt gives a 100% chance of interest expense, so it will be the focus of all available money, even with a small emergency fund … I would maintain the minimum buffer needed so that I can sleep at night and then drop everything else. cash on credit card debt.

In this case, you can reduce the amount of debt repayment if your emergency fund reaches this “minimum buffer”.

On the other hand, Money Crashers suggests saving a little more before dealing with debt:

Paying off your debt primarily helps your credit score and gives you peace of mind, but it doesn’t help during a financial crisis. If you put all your money into paying off debt, you will have nothing left over for a rainy day. Create a six to eight month contingency fund that can help you in the event of a job loss, divorce, or illness. It also prevents you from going deep into debt when an emergency occurs.

If you like this advice better, you can go further and reduce debt repayment while in “emergency mode.” Consider this advice and then weigh it against the details of your own situation, including:

  • How much does it cost in your emergency fund to start with?
  • What is the likelihood that you will drain it, and how long before this happens
  • How soon will you have a stable income stream

From there, come up with an “emergency budget” saving goal or debt repayment amount that is convenient for you. Plan to suspend or curtail any transfers or automatic payments in an emergency.

Reduce fixed costs

After considering your secondary and financial goals, it’s time to rethink your needs. These costs are the same every month. Maybe your cell phone bill. Your rent. Vehicle registration.

These costs are fixed, but this does not mean that they cannot be reduced. List your persistent needs and see if you can find ways to reduce them. When I was in emergency mode, this is how I did it:

When it comes to insurance rates, you might be tempted to cut your coverage when you’re in emergency mode. You may be thinking about dropping comprehensive coverage, dropping renter insurance, etc. But keep in mind: when you’re in emergency mode, that’s when you need security most. For me, this is when it makes the least sense to cut back on something like insurance coverage. Reduce the number of essentials, but do not risk doing without those that can further exacerbate the situation.

Be economical with variable costs

After checking your persistent needs, it’s time to tackle your variables. First, look for essentials that change in value every month, such as your electricity, food, and gas bills.

Then find ways to be frugal in each of these categories. I Heart Budgets recommends starting with food , which may vary slightly:

Reduce your food budget. I know, I know, it’s not easy at all. But if you lose your job, you’ll find a way to take $ 50 off your food budget, even if you’re not eating an equally healthy diet, while dealing with this emergency. There is no point in starving because you “need” natural pine nuts.

For other categories, you may find our bill payment guide helpful . Here are a few more important points to consider sparingly for different needs:

Electricity :

Gas :

Groceries :

Of course, these are just examples to get you started. They will not be possible for everyone in every situation.

Obviously, frugality is a good thing whether you’re in emergency mode or not. But now is the time to rethink any of the lean methods you used before because they were too inconvenient or because you had enough money to skip them. When you’re in emergency mode, convenience should just wither away. Reduce your variable needs as much as possible. If frugality is new to you, here are some basics .

Even if you draw up this budget before a real emergency occurs, it just helps to know which categories are variable and which cost-effective options are realistic in the event of an emergency.

Realign strategically out of your skeletal budget

After you’ve drawn up the highest budget possible, look at the numbers. What are your monthly expenses after you ditch luxury goods, be frugal, and reduce the cost of your essentials? This is the number that you will have to get from your fund every month when you are in emergency mode.

You know your own habits and situation. While I prefer to cut out everything unnecessary in emergency mode, you can feel comfortable leaving a few small luxury items in your budget. If this is the case, consider how much you are comfortable adding back based on how much you saved for the emergency, and how long the emergency is likely to last. Or wait for your situation to improve slightly and then gradually add them again.

Then, after the emergency is over, you can return to where you were previously. After my emergency, I found a small source of income in side jobs. From this point on, I started to rebuild my budget:

  • Found a small source of income at a side gig
  • Replenished my emergency fund
  • Added back to several of my “wishes”
  • Started contributing to my savings again
  • Updated other budget categories as needed.
  • More “desires” were gradually added as my income stabilized.

The Emergency Fund is a big relief when you need it. But you also want that money to be enough. If your emergency is long term, or if you are going through the financial crisis longer than expected, having an emergency budget can help. Emergencies are stressful, and anything that can ease that stress can help you focus on getting back on your feet.

More…

0
Personal Finance

Leave a Reply