How to Recover Your Finances After Your Emergency Fund Dries Out

Several years ago I changed my career and moved to a new city. Financially, I felt safe because I had a small emergency fund. When times were tough, it was my safety net. Times have really gotten tough. I lost everything in an instant. If you’ve run out of your emergency fund, here’s how to restore it.

When I transitioned from full-time to freelance, I was poorly prepared. I did not learn much about how to change my financial situation, for example, on taxes . One April night, after analyzing some tax data, I realized that I not only owed much more than expected, but also received penalties for not paying my quarterly estimated taxes. Ouch. With one giant check to the IRS, my entire emergency fund was gone.

For a long time, I felt vulnerable, desperate and unsure of what to do. But after about a year, I rebuilt my emergency fund and became financially secure again. Do this to recover from the loss of your safety net.

Create an emergency budget

The first thing you should do after losing your emergency fund is to revise your budget. You are in emergency mode and should adjust your monthly spending accordingly. Depending on how serious your situation is, you may want to consider an emergency budget , as one of our readers called it.

This is similar to regular budgeting, except that you want to cut down on unnecessary expense categories. The regular budget might include, for example, restaurants or shops, but the emergency budget is much stricter. Your financial focus should be on replenishing your fund, so ditch all of these luxury items.

I Heart Budgets offers some more tips for creating an emergency budget :

• Get rid of your savings. If you have savings categories for things like vacations, Christmas, gifts, car maintenance, and home renovations, I suggest deleting them first …
• Reduce or remove waste of cash. Depending on how serious the emergency is, I suggest drastically reducing or even deleting this category. You cannot spend money that you do not have …
• Find alternative transportation. You’ve been about to catch a bus or car park for a while now, which could be better than when you can barely afford to drive. It can be a pain in the rear, but you need to save $ $ in gas to survive.

Also, consider if you can find additional ways to manage your daily necessities carefully . For example, try discussing your bills (if you haven’t already). The idea behind an emergency budget is to cut as many costs as possible until you have some kind of safety net.

Yes, it’s usually important to give yourself a little breathing room in your budget. But your emergency budget is n’t permanent. It is a short term financial emergency plan. Once you are on your feet, you can start adding these “needs” back. As I realized my emergency budget, I gradually gave myself more room to get going as my situation improved.

Finally, don’t forget to create a budget category to replenish your emergency fund. It might not be that much at first (I didn’t), but when you get back on your feet, you can adjust this amount and other categories accordingly.

Look for any opportunity

In despair mode, something interesting happened to my worldview. What I once thought was a burden, now I saw an opportunity to rebuild my finances. For example, I was grateful for overtime work, although I was usually afraid of it. I also took on other freelance work.

Opportunities were noticed everywhere, however insignificant they might seem. Money received from my credit card rewards? A small step towards getting back on your feet. A bag full of clothes that I no longer wore? I could sell them for some cash to put in my fund. It was not much, but better than zero.

When you are in emergency mode, it helps to re-evaluate windfall income or liabilities as opportunities to rebuild your fund. Of course, not everyone has such opportunities. Some people do their best, but they still lack. I can only speak of my own experience when I say that a little resourcefulness can go a long way during this time.

Don’t neglect your safety nets

When you are in a vulnerable situation, you do not want to aggravate the situation. There are things you say to yourself when you’re broke. For instance:

• Tenant insurance
• Car insurance
• Medical insurance

They are easy to overlook and be considered luxury items. But if you don’t prepare for the worst, you can get stuck in the paycheck to paycheck cycle . One accident without a safety net is enough, and your financial situation goes from bad to hopeless. Was there; I don’t want to go back. This time I learned to cover myself not despite the fact that I was in emergency mode, but because of it.

Develop a backup plan

The worst part of losing your emergency fund is the possibility of another emergency. Instead of letting your insecurities make you make a desperate short-term decision, come up with a back-up plan. What would I do if I lost my job and couldn’t pay the bills? If my car suddenly breaks down, how will I pay for it?

When I did that, I decided that I would find a second part-time job. If that doesn’t work, I may have to take out a personal loan or use a credit card. But knowing what I was going to do was only one step in my plan. The next thing was to think about the details. If I got a second job, how would I combine it with my current one? If I had to take out a loan, what would my repayment period look like and how long would it take before I could return to my emergency fund?

Thirdly, I wanted to put everything in order in order to implement this plan, if necessary. This meant:

• Updating my resume
• Looking for a job, just in case
• Knowing what the fees and annual interest rate are on my current credit cards
• Checking my credit report and score

This may seem like overkill, but remember: you are in emergency mode. By thinking about your contingency plan, you can avoid desperate decisions.

Widening the gap between expenses and income

The basic rule of personal finance is that you create wealth by spending less than you earn. You want to widen the gap between the amount you spend and the amount you earn. And there are two ways to do it: spend less money and earn more.

I could have replenished my emergency fund simply by cutting it – spending less . But I had to focus on making more money in this financial stability equation.

We’ve talked about this before, but it’s worth repeating: earning more is easy, but not easy. It took some effort to figure out each of the points, but here’s what helped me the most:

• Learning to ask for a raise
• Networking to find a better job
• Part-time work and participation in side concerts

After saving up some money in my emergency fund again, I focused on making more money to widen that gap and investing to really stabilize my position. I created a starter portfolio and gradually learned more about personal finance in general.

There is nothing better than feeling like you’ve lost everything you’ve worked on and the dangers of falling into debt again after spending so much time getting out of it. But ultimately that’s what your emergency fund is for: to protect you. Things could be much worse without it, so it’s important to do whatever you can to restore it.

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