Have an emergency plan
Anyone that depends on the oil patch or agriculture for their livelihood knows that during certain times of year payday just doesn’t come. An overly wet, drawn out spring break up or a disastrous harvest can leave many area residents scrambling to make their payments.
When you are self-employed, an emergency plan is a must because you aren’t eligible for unemployment. But even if you are an employee with a seemingly secure job, saving an emergency fund is an essential part of anyone’s budget. Having a line of credit with the bank does not count as an emergency fund. If you dip into your line of credit you must have the funds to pay it off before interest sets in or you’ve only managed to create a real emergency by using it. The interest may be lower than a credit card, but incurring more debt because you didn’t save is no plan at all.
What is a real emergency?
Needing winter tires in October does not constitute an emergency, and shouldn’t drain the reserves of money you have set aside for the unforeseen. The same goes for that warm vacation or the larger screen TV. Experts recommend keeping 3-6 months worth of your necessary expenses saved for calamities like illness, job loss or any event that prevents you from having an income for an extended amount of time. Seeing what has happened with the price of oil, many people can say from experience that having a year’s worth of expenses saved is a better idea.
Regular car maintenance like tires is a predictable expense. If you have a vehicle you must anticipate that it will cost you money and save accordingly. Saving for emergencies has to happen in addition to saving for regular expenses that happen in life. Yes, shingling your house will be a major expense but if you are on year 30 of a 25-year shingle it is time to start thinking about how you will pay to redo your roof.
Don’t be emergency prone
In other words, be proactive. Have a look around your house, yard and family to identify what is coming down the pipe. Is your eldest planning on college? Youngest needing braces? Maple tree touching a power line? No one is saying it’s easy to save for all of these possibilities plus the depressing prospect of losing your job, but it does take the lustre off another trip to the mall, doesn’t it? Before you spend unnecessarily on “wants”, have a realistic look at your “needs”. While expenses like mortgage, power and water are obvious in the budget, make sure that you are also saving for the less common (but no less expensive) eventualities that should not be paid for out of emergency funds.
This column is such a drag
It can be hard to squirrel away money and not touch it. Over time, people relax and begin to look at their emergency funds as spendable cash. But doesn’t it make more sense to hide that money on yourself and begin a different savings account—one that can be touched—for all the things you would like to purchase?
It’s not that you will never get to eat out again in your life. With careful saving, watching for sales and a lot of patience, hopefully you can find a balance between delaying gratification and getting your financial ducks in a row. Yes, planning for a stable future will likely mean some sacrifices now. It is a lot easier to eliminate some discretionary spending before an emergency strikes than to try to save money in a scenario of restricted income. Put off painting your house. Make do with the mismatched appliances and last year’s winter coat. Get some emergency funds in place before you spend on things that can wait.
If you’ve honestly looked at all the money you spend in a month and can find nowhere else to make cuts, pat yourself on the back and keep searching for ways to make a little extra. Divert any extra money to one of two places—paying down your debt with the highest interest rate and saving for the unforeseen.
If you regularly spend your entire paycheck without contributing to emergency savings (and don’t have any money set aside for a real crisis) please sit down with pen and paper and determine how much money you would need to pull yourself through an unexpected job loss, illness or accident.
Preparing for the worst doesn’t mean you wish for it to happen. If you are very, very lucky you may never use that emergency fund. But having it and not needing it is sure preferable to needing it and not having a penny set aside to back you up in hard times.