Are Emergencies Holding You Back?
Over the last two weeks, I’ve written about how to create your IDEAL financial scenario. How much would you be saving and giving if you could snap your fingers and do it today? How much, exactly, SHOULD you be saving?
This week I want to look at one of the things that hold people back from achieving their IDEAL scenario: a lack of emergency savings.
Emergencies are a Fact of Life
When someone says “emergency” you probably think of those one-in-a-million events that are truly rare. A death or sudden medical problem fall into this camp.
But when talking about your finances, the definition of “emergency” is broader. Financial emergencies are those expenses that are infrequent but large enough to cause problems with your cash flow.
Examples of these might be needing a new set of tires. Or a child breaks their arm on the playground and goes to the hospital. And as many homeowners know all-too-well, there’s a myriad of $1,000+ things that break around the house all the time.
Americans Aren’t Prepared for Emergencies
The Federal Reserve did a study that found 40% of American households aren’t prepared for an emergency of $400. I don’t know about you, but whenever I have an emergency they’re always a lot more than $400. New tires, new brakes, or a busted A/C unit at home can easily run you $1,000 or more.
If 40% of Americans aren’t ready for a $400 emergency, how many people do you think are ready for a $1,000 emergency. Or worse. Losing a job and going without income for a month or two?
From Emergency to Full-blown Crisis
If Americans aren’t prepared for emergencies, what are they doing when emergencies happen? Why, they finance it! It’s the American way!
I’m always amazed at the things we can finance. Two years ago my 12-year-old Bichon dog (Molly) was diagnosed with cancer and needed some expensive treatment. Before the vet treated her, they had someone come in to explain to me a program called Care Credit. This program would allow me to finance the care of my Molly-girl. Fortunately, we had savings to cover the expense.
Here’s the problem with “charging away” our emergencies: it turns a manageable expense into a much bigger one. Throwing a $1,000 expense on to a credit card charging 18% interest turns that $1,000 emergency into an $1,800 problem.
This is precisely what people are doing, according to the same Federal Reserve study.
A few emergencies put on a credit card over the course of a year adds up and is a key reason why so many people also struggle with debt. It’s a never-ending cycle of Emergencies → Credit Cards → Paying down the credit card until… → …the next Emergency.
Are you struggling with debt and feel like it never goes away? “Emergencies” might be part of the problem.
Emergency Funds = Shock Absorbers
An emergency fund acts very much like shock absorbers on your car. They smooth out the bumps that you’ll inevitably encounter.
Understand this: You WILL have financial emergencies. Whether you’re prepared to deal with them or not doesn’t affect the inevitability of these emergencies.
Wouldn’t it be nice to be able to pay that next $700 emergency in cash? Having some emergency savings set aside would allow you to do that.
Smoothing out financial bumps in the road is one of the best strategies for winning with money. When you’re prepared to deal with emergencies, you avoid a crisis. Instead of becoming a crisis, emergencies will instead turn into a minor nuisance. This does wonders in building your confidence to do other things with your money.
As I like to say, consistency and predictability are the secret ingredients to financial success.
How Much to Save
The standard rule of thumb is that you should have 3-6 months of living expenses stashed away in your emergency fund. The idea here is that you want the size of your emergency fund to be large enough to handle a job loss.
Emergency funds can’t solve all your problems. But having enough stashed away to live on for a few months gives your family time to collect itself after a major emergency. If a job loss happens, you can take a deep breath, collect unemployment, and start looking for work. CALMLY…knowing that your family has enough to live on for several weeks or months.
Remember, just 10 years ago we were in the midst of the Great Recession and the unemployment rate was over 10%. The times are good now. They won’t be forever. NOW is the time to start building that emergency fund!
Conclusion: Don’t Let Emergencies Run Your Life
How you deal with emergencies goes a long way towards explaining your relationship with money. If “crises” keep throwing you off, beating you down, and frustrating you, then that’s likely what you’re experiencing in other areas of your finances.
Smoothing out the effects of emergencies builds your confidence. Think about being able to write a check (or swipe a debit card) for your next $1,000 home repair. How would that make you feel? Like a winner, for sure!
An emergency fund helps build consistency and predictability into your family’s finances. So build one now! Times are good and it’s only a matter of time until our economy encounters another recession.
Doing so will help your IDEAL Scenario become possible.
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