The following is an excerpt from my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.
There isn’t a better case study of being financially prepared than the recent outbreak of the coronavirus and the subsequent collapse of our economy. We were previously enjoying perhaps the greatest economy of all time. Unemployment was minuscule while growth, development, and salaries were all booming. The stock market posted the longest bull run in history (11 years) and then crashed to a halt. These are the times that prove to us all what the value of an emergency fund truly is.
Expect the Unexpected
Without a doubt, the biggest challenge when it comes to budgeting and planning is preparing for the unexpected events in life. Nobody wakes up and plans for their car to break down, to get sick, or to receive a traffic violation in the mail – or especially a pandemic to break out. You can never prepare for everything and we’ve all heard the saying, Life is what happens when you’re busy making other plans. As difficult as it may be, we must account for the unpredictability of life. As a result, having a savings account for emergencies becomes even more vital.
Case in Point: Two days before my wife gave birth to our first child, we had a gas line break at our condo. We immediately hired a plumbing crew for the repairs. The next day, our hot water heater went out. I called the same plumbing team back out to replace it. In the blink of an eye, we were staring at $4,000 worth of emergency repairs. Fortunately, we had built enough savings to cover the cost, but it was still a huge hit. Unfortunately, most people are not able to pay cash for such an expense and are forced to use credit. Unforeseen events like this are a real-life example of how easy it is to get swamped with debt and how difficult it is to stay out of it.
On the other side of the coin, buying an 80-inch, flat-screen television does not qualify as an emergency. Once again, this is where your change in mindset and behavior modification is going to come into play. Remember, misidentifying an emergency may lead to an actual emergency down the road.
Unplanned Expenses
This is the budgeting entry that gets us all in trouble. How do you prepare for the unexpected? Well, that’s why they call it an emergency fund. There was the time our condo A/C unit went out costing us $2,200 to replace. Here’s another one for you: when my wife and I were trying to enjoy our honeymoon, my phone began to blow up with calls and messages from our downstairs neighbor. Since we were on our honeymoon, I had no interest in dealing with neighbor issues. After the third voicemail in 45 minutes I decided to call back. Apparently, there was water leaking from our unit down onto theirs. Of course, there was nothing we could do about it because we were several hundred miles away. When we got home, the first thing we did as newlyweds was call a plumber and have them repair the leaks, which cost us $2,500. What a lovely wedding gift that was! Life punches you in the face sometimes—that’s why it’s vital to prepare yourself the best you can. Don’t lie to yourself and say, “Oh, that will never happen to me.”
Top 10 Unexpected Expenses
- Medical costs
- Technology repairs (computers, TVs, smartphones)
- Car troubles
- Home repairs
- Taxes
- Traffic violations
- Gifts
- Travel (weddings, funerals)
- Pets
- Hidden work-related costs (e.g., a new suit for a big meeting)
Our (good) health is one of the biggest things we take for granted. Which is why it should be no surprise that medical bills are the No. 1 cause of U.S. bankruptcies, according to CNBC. It’s estimated that 643,000 Americans go bankrupt each year and more than 2 million people have been adversely affected due to medical costs. High medical bills from accidents are difficult to avoid. In those situations, a financial cushion is imperative. Don’t expect health insurance companies to completely protect you. High deductibles and other out-of-pocket expenses have bankrupted many people. Plan to have at least the amount of your deductible in savings.
Emergency Funds are for Emergencies
I would highly encourage you to immediately save $1,000 as an emergency fund to jumpstart the process of becoming financially fit. In fact, many experts will tell you that $2,500 is a safer number to shoot for but you have to start somewhere. Do this before you pay off any debt. Considering 66 million Americans have no money set aside (and 73% have less than $1,000 in the bank) once you have accomplished this feat, you will be ahead of the game! Additionally, experts like Dave Ramsey will tell you to have 3-to-6 months of living expenses on hand. Establishing an emergency fund is a great goal—obviously the more you have the better. However, start first with the $1,000, and then refocus on crushing your debt.
Final Thoughts
As you develop your strategy, figure out what system works best for you to establish an emergency fund. Open a savings account and start an automatic monthly withdrawal of $25 from your checking. At the end of one year, you’ll have $300. Or you can put $100 cash in an envelope and hide it in your sock drawer every three months and you’ll have $400 after a year. Whatever system you choose, you’ll alleviate a lot of undue stress if you have some immediate cash on hand. Start small and slowly build it. That way you won’t notice when it’s gone. It will become habit. Some money saved is always better than none.