Make an Emergency Budget Before You Have to Deal With a Financial Emergency
Everyone reading this site has heard a thing or two about the importance of having a contingency fund . But when such an emergency occurs, how can this money be used wisely?
Erin Lowry, aka Broke Millennial, recently asked on Twitter:
Some emergency expenses come down to one-time inconveniences: a flat tire, a chipped tooth. But if the emergency continues in your life, it’s time to turn to your Doomsday budget.
This can help you switch to autopilot during difficult times. Instead of thinking about how you will stretch your money to cover the emergency period, you can open Plan B, C, or D and simply follow the instructions you left for yourself.
If you’ve never thought about serious “what-ifs” before, here’s how to think about them without having a full blown panic attack that leaves you wheezing on the floor (no guarantees, only cautious optimism here).
Don’t wait for an emergency to manifest
If you cheerfully celebrate how many times you get paid over the course of a month without worry, stop doing it and start thinking about the worst-case scenario. What happens if you lose your job? Should your partner lose their job? What if you suddenly have to pay for your own insurance or have recurring medical expenses? If the car is out of order and the check from the insurance company is less than desirable? If your partner falls into a hole?
Sorry for the role of this person, but if you find yourself in any of the above situations, the last thing you need to do is say, “Honey, where do we cut the budget now that you are trapped in a sinkhole? yard for the foreseeable future? “
Do it now to avoid this insane fight in the future. You will need to make changes as soon as you find yourself in a situation where an emergency budget is required, but you will know enough from your preparation to move forward with relative ease.
Make a copy of your current budget
If it’s a spreadsheet, make a copy. If you have it all stored in the app, write it down (digital or analog, your choice). Here you can play with the numbers to see how long your emergency fund can last if you need it for a while.
If you want to play around with multiple scenarios, you can make endless copies of your budget and start cutting back. But maybe let’s start with one alternative version first.
Review your subscriptions
Which ones are easy to undo? Perhaps you can suspend monthly payments for Hulu / Netflix / HBO / Spotify / Pandora / Audm / etc. for a small additional fee.
I am not suggesting spending half a day on the phone at your internet / cable / cellular company or at the gym if that is going to be a huge problem. If you know how to set up your services or are not stuck with a terrible contract, you might want to ditch it in the event of financial misfortune.
Review your “funny things”
If you have items in your budget for dining, gifts, charity, or clothing shopping, see what happens if you narrow those categories down to zero. You can still take out groceries or buy gifts from time to time, but a sharp cut in those positions can make a difference during tough times.
Reduce debt payments to a minimum
Car bills, house bills, and student loans still need to be paid, but if you pay extra, you can cut back on your attempts for a while.
Assess your savings habits
If you have automatic savings or brokerage accounts set up, you can turn them off to have extra money.
If you have regular contributions to your retirement account, you can end them, although I personally would advise this as a last resort. For the stress you owe to the stress in the future.
Review your Doomsday budget every time you update your regular budget.
Once you’ve sliced and diced your budget, you can divide your emergency fund amount by your monthly spending to see how long that money will last.
This is the least fun activity in your short leisure hours, but please let me be the first to tell you that it’s worth it. When I got fired this spring, the first thing I did was open the budget spreadsheet, made a copy, and started working. It gave me peace of mind knowing that I could swim for months looking for work, but it would be even better if I didn’t have to think about it immediately at all and I could afford to wallow in the waves. sofa watches HGTV in a daze for several more hours (days).
Stressful situations are not the best time to suddenly revise your entire budget. Do this before an emergency occurs.
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