Emergency Fund Archives - Faithful with a Few

Have a Budget Account – To Keep You From Raiding Your Emergency Fund

Most of us are familiar with the concept of an emergency fund and why you need one. It is the most fundamental type of savings that you can have, because it is there to provide a cushion against sudden and unexpected financial issues.

Some people are never able to get an emergency fund going. As a result, they often don’t move on to achieve any level of financial independence because they are constantly faced with emergency situations and no funds to deal with them. Others establish emergency funds, but end up draining them for non-emergency purposes.

The best way to avoid that fate is to set up dual savings accounts – an emergency fund, and a budget account that will prevent you from raiding your emergency fund when it is not absolutely necessary.

Set Clear Definitions For An Emergency

The only way to have a successfully functioning emergency fund is if you set very specific definitions as to what constitutes an emergency, and you never dip into the account unless the crisis fits neatly within the definition.

Everyone’s concept of an emergency fund tends to be a little bit different, but I think that the key definitions are sudden and unexpected. Sudden, as in an event that seems to come out of nowhere. If it is something that you knew was coming, it does not fit within the definition of sudden, and is not a legitimate emergency.

“Unexpected” is another critical definition. If a financial event is truly unexpected, it means that you had no reason to prepare for it in advance. Anything that you do know beforehand should hardly constitute an emergency.

A job loss, for example, can qualify as an emergency because it is sudden and unexpected. Replacing all four tires on your car doesn’t fit either definition, because it is a maintenance item that you knew about long in advance.

An Emergency Fund Should Never Be A General Use Bank Account

An emergency fund should be an account that is special and set apart from the rest of your finances. If you are using your emergency fund simply to cover monthly budget shortfalls, that is not a true emergency fund. It is important to maintain that distinction, otherwise an emergency fund is simply not an emergency fund.

Your checking and savings accounts should represent your general use bank accounts. That means they are available to cover your normal budget, as well as any expected expenses. If there is an imbalance here – that is, an insufficient amount of money in these accounts to cover your expenses – then you have a structural financial problem. The problem could either be insufficient income, or excessive spending. An emergency fund will not fix either of those problems, nor should it be expected to.

Set Up A Budget Account To Handle Expected Expenses

One of the ways to avoid imbalances in your budget, is set up some sort of budget account. This should be an intermediate level account. It should be more accessible than your emergency fund, but less so than your checking and savings.

While your checking and savings should be available to meet your normal spending budget, and your emergency fund is held for true emergencies, a budget account can function as a halfway type of account.

You won’t use this to pay regular bills, but rather you’ll use it as a an account to pay for anticipated expenses. This will largely include maintenance costs and near-term spending priorities. Knowing these expenses are coming up, a budget account will enable you to put money aside in anticipation of meeting them.

Maintenance costs that you should be funding through your budget account can include:

Expected car repair expenses. If for example you expect to average $1,000 per year for car repairs bills, you should be putting away about $80-$90 per month to budget for this.
A roof replacement that’s expected in five years – if the cost will be $6,000, you might want to begin saving about $100 per month in anticipation. The 60 months between now and then will allow you to save the money you need.
Your refrigerator is ten years old, and it will cost $1,000 to replace; figuring it will last another two years, you may want to begin saving at least $40 per month ($1,000 divided by 24 months).

Near term spending priorities might include some of the following:

Saving up money for a family vacation. If you know that you’ll be spending around $3,000 for your vacation, you should be putting $250 into the account each month ($250 X 12 months = $3,000).
Holiday expenses. You can think of your budget account as being something like a Christmas club account – putting away a certain amount of money in anticipation of heavier expenses at the holidays.
Your eight year old looks like she may need braces in a few years – you can begin saving for this in your budget account.

Each of these expense types are fully expected, and therefore they are hardly emergencies. You can and should budget for them, and by having a budget account set up you can do just that. If you do it faithfully, you will not need to raid your emergency fund, nor drain your regular checking and savings accounts.

It seems a bit complicated, but can you see the merit of having dedicated accounts to cover different levels of expenses?

Why We Want To Start A Giving Account

By // by Khaleef Crumbley

Late last year when I wrote about unexpected financial blessings I mentioned that one of the reasons why we wanted to pay off debt and save money is to be able to help others.

This has been something that my wife and I talked about many times, even before we got married. We both separately had a goal of being in a position to freely help people whenever there was a need, without being restricted by our own needs.

It would be great if someone could come to us needing a few hundred or even thousand dollars, and us being able to help them out. Right now, we’d have to sell things at a loss, make withdrawals from our retirement account (facing stiff penalties), or simply not pay rent or other bills for a period of time, in order to help them out.

Blessed By Someone With A Giving Account

When I wrote the post about financial blessings, I told about a time where I had to depend on the kindness and preparation of someone who I barely knew…

A long time ago I had a little bit of trouble with my driver’s license. Because of this, I needed to pay off my financed car immediately. The only thing is that I was broke and I still owed $2,000 on the car! If I couldn’t come up with the money in a short period of time (like a week or 2), they would repossess the car.

My wife (who was just my girlfriend at the time) told her best friend about my problem. He then offered to give me a loan for the full amount and allow me to pay it back over 8 months without interest! My car payments were about $241/month, and I was able to pay him back at $250/month.

I had met him a few times and we were cool, but I wouldn’t consider us friends at that point. However, he still felt moved to help me with such a large gift. At that time I was working full time and I went back to school – I couldn’t afford to have my car repossessed.

His generosity really helped me get through a very tough time, and he was able to part with this money because he had it set aside in a giving account.

So there is one time where I have been the recipient of an unexpected financial blessing from someone I barely knew. Over the years I have had family members and friends step in to help my out financial at various times. I definitely know what it feels like to not be able to get out of a situation on my own, and having to depend on the kindness of others.

As I began to grow in Christ, I have come to realize that it was really God working through these people over the years (which is why the always come along at the “right” time). This has really helped to fuel my passion for wanting to help others.

Since my wife and I have the same desire, this will be an imperative in our marriage going forward!

Setting Up A Giving Account

To us, the biggest part of being able to help people in need when they need it, is for us to make those sacrifices a normal part of our lives. What I mean by that is that we plan to set up a savings account which will only be used when someone comes to us (or to our church).

Our goal is to put money aside with each paycheck in order to build up this “giving account”. This way, it will be much easier to give to someone without there being a major disruption to our finances. It will be much easier to give someone $1,000 if we actually have $5,000 put aside for that purpose, rather than pulling it out of our emergency fund or, worse yet, our operating budget!

So just like I believe that our savings can be set aside for various spending purposes (housing, college, emergencies, retirement, etc.), I also believe that if giving is extremely important to you, this type of savings account can be very beneficial.

We would hate to be in a situation where someone desperately needs help, we feel that God is leading us to help, but we don’t have the resources at the moment. That’s why we want to be as prepared as possible. So essentially, we would be setting up another emergency fund, but it would just be for the emergency of another person/family.

For those who are concerned that this would take the sacrificial nature out of giving, consider this: The amount that goes into the account from each paycheck will be a sacrifice for us; we are simply making the sacrifice every 2 weeks rather than making it at one time.

This way, we can take advantage of the times where we haven’t come across someone in need, so that our giving can be larger in amount, reach, and impact. So instead of finding a way to come up with a significant amount of money at once, the sum of our smaller, but regular sacrifices may provide enough for us to meet the need more fully.

Unfortunately, because we still paying off debt and find ourselves deep in debt bondage, we are not able to start building this type of account. But the fact that this is so important to us provides us with a significant motivation to pay off our debt as quickly as possible.

What About You?

How do you manage the money that you give above your “normal” giving to your local church? Do you save money for that purpose and then give when something comes up, or do you simply pull the money from your checking account when the need arises?
If you are married, has there ever been a time where you and your spouse have disagreed on trying to help someone? If so, how did you resolve the situation?

Are You Preparing for the Next Recession?

By // by Kevin M

This is a bit of a depressing topic, isn’t it? After all, we’re in the middle of summer and it’s just about the peak of the high vacation season, right? Why try to throw cold water on everyone’s good times?

Three reasons:

The economy is already showing signs of slowing,
The presidential election will be over in three short months, and no matter who wins it’s anyone’s guess what will happen after that, or even
I’m a mean person who’s trying to rain on everyone else’s summer fun.

I’m not sure that we ever really got out of the last recession, or if the last one wasn’t just an uglier continuation of the one before that, but the reality is that we have a downturn every few years. Since the last one officially ended sometime during 2009, 2013 seems like a good guess on the arrival of the next one. That gives us about a year to prepare, and that’s Reason #4 why I’m writing about this topic.

In the strange way that life works when we’re prepared for trouble, it never seems to happen! So how do we prepare for the next recession?

Avoid (or Tone Down) Major Purchases

Major purchases do two things that hurt us when the economy turns bad: 1) they drain savings, and/or 2) they put us in debt. I’m talking about cars, houses, furniture, boats—anything that has the potential to cost a couple thousand dollars or more.

Before making any major purchases, ask yourself the following questions:

Do I actually need this item, or do I mostly just want it?
Will this item put money in my pocket? (for example, a car for work, or a computer for business)
Were I to lose my job six months from now, will I regret having made this purchase?
Even if it’s something we truly need, do we have the ability to buy it without draining our savings or adding more debt?
Would a decent second-hand model get the job done?

Major purchases can’t be easily undone—especially in recessions.

Find Income Sources Outside Your Job

For most of us, the biggest threat from recessions is the loss of a job. One of the best ways to deal with this (in advance) is by creating income sources outside your job. It’s not just a matter of adding more income, but also of exploring and developing other career directions. This is especially important if the business or industry you’re in is already wobbling.

{Learn how to honor God in the workplace}

Working outside your job will give you the experience and business contacts and references that might enable you to transform a side job to your next full time position. Get your foot in the door before the economy takes another slide.

Another option is to start a side business. You can start it and grow it while you’re still on your employer’s payroll, but if you lose your job you can ratchet the business up to full time.

Say NO to New Debt

The last thing you ever want to do is to create financial obligations during good times that you’ll have to pay for during not-to-good times. This is what drives foreclosures and car repossessions. If you want to avoid that fate, don’t add any new debt.

And while you’re at it, start working on paying off old debt. Debt is a big enough pain during good times, but its pure excess baggage you don’t need to be lugging around during the bad ones. If you lose your job, you can always cut expenses quickly, but debt takes time. You have that time right now.

Build Up Those Savings

At a minimum, a fattened bank account can give you breathing room to deal with a sudden job loss or other financial calamity. It enables you to face problems without having to borrow from banks, or beg from family. Start working on increasing your savings now.

Remember those major purchases I recommended that you not make? You can add to your bank balance with the money that you didn’t spend on them. And the extra income from your side job or side business can go right in the bank too. A year from now you could have a few months living expenses sitting in the bank, and that’ll feel good.

Get In Shape

This reads like my most ridiculous preparation, but actually it isn’t. In fact, it’s far from it. Exercising, dieting and improving your overall physical condition are always important, but never more than when hard times hit.

Consider:

If you’ll be in the job hunt sometime next year, you’ll be glad lost a few pounds and toned up a bit. When jobs are hard to get, they often go to those who look the most capable of doing them.
In the event you have to juggle two or three income sources, you’ll need the increased stamina getting in shape can bring.
The healthier you are, the less you’ll need to spend on healthcare, and the less time you’ll lose from work.
Concentrating on your health could be the significant distraction you need that will boost your mental and emotional state at a time when finances are getting difficult.

A recession will come whether or not you’re prepared. But if you are prepared, there’s a good chance it won’t be your recession! And if it doesn’t come, you’ll be better prepared for what ever else you want to do in your life. Like that run for financial independence you may have been putting off for a few years.

photo credit: Freedigitalphotos.net

4 Ways To Prepare For Emergencies

By // by Khaleef Crumbley

Most of us will face some type of financial emergency at some point in our lives. Because of this fact, it is not our ability to avoid such emergencies that leads to financial success, but it is often our ability to recover from them that matters. Even though we don’t know when, where, or how an emergency will come, there are some practical things that we can do in order to help us withstand them.

Having a financial contingency plan is always important, even more so, now that the economy is more unstable than ever, it is a necessity for every household! Trying to keep your finances organized when trouble strikes is part of the key to surviving and thriving in these situations.

Here are 4 things that you can do now in order to prepare for financial hardship:

Plan What Expenses To Cut

I think this is the first and easiest step in preparing for financial hardship. Before the disaster even comes, you can evaluate your expenses and determine which ones you could easily cut if necessary.

Think about it: Do you really need to have 500 cable channels? A data plan for you, your spouse, and all the kids? A car for every adult in the home? A two-week long vacation every summer; and another one for your anniversary?

I’m sure we can go on and on about what unnecessary expenses you can cut, and everyone’s list would be different; but the main point is that you have to think of these things before the emergency hits. Discuss this with all the members of your household now and see what current expenses you all could do without.

Thinking through these things in advance will be much easier, since financial hardships have a tendency to stir up strong emotions and make it hard to concentrate on the task at hand. Avoid the stress, the arguments, and the finger-pointing by making the tough decisions now, before the emergency strikes!

What Items Can You Sell?

While you’re talking to your family about what expenses you can cut out of your budget during a financial crisis, you should also make a list of the things you can sell. A good financial contingency plan will take into account how much money can be gained from selling certain items.

Again, it will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship! Decide what items you can do without, and do some research to see how much you could possibly get for them. Knowing that you can get $7,000 for you 2nd car may be all that you need to survive a financial emergency.

Even if you don’t have a spare car, you can look for other items that you can sell during tough times. For instance, do you have a fancy lawnmower? Sell the fancy one, and buy a simple, used mower. This may not be ideal, but neither is being in the middle of a financial disaster with a fancy lawnmower, yet not enough money to make another mortgage payment!

If the emergency lasts long enough, or the financial disaster is large enough, consider selling your home and renting. Of course this only works if your house can sell for more than you owe (not the case for many who purchased within the last 5 years)!

Look at everything that you own, and decide what you can sell now. This is another tough decision that should be made before the emergency comes.

Establish An Emergency Fund

This is probably the most common way that we prepare for financial emergencies (it’s actually in the name ;-)). It is easy to set up an automatic transfer or direct deposit to your savings account, and let the fund build up to whatever your goal is.

Having money set aside will be extremely important if you were to lose your job, or face some other financial difficulty. In our case, once we are out of debt, we will aim to have between 9 months and a year of living expenses in a high-yield savings account. But for now, our goal is to be able to cover at least two months.

Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through a difficult time. The purpose of an emergency fund is to remove the stress, fear, and even the need to borrow, when financial hardship comes. Every good financial contingency plan should involve a large emergency fund!

Pay Off Debt

Next to having an emergency fund set up, this is probably the most important step you can take in preparing for a financial emergency.

It is much easier to adjust your living expenses than it is to rearrange your debt payments. So when you are in a position where you need to free up a large amount of committed money, you won’t have over $500 in student loan repayments (I’m telling on myself again) to worry about!

This doesn’t just go for long-term debt like student loans, mortgages, and car notes, but you need to fervently attack any short-term debt – such as pay day loans, personal loans, and even store/shop financing on things such as furniture or car repairs

Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may cause you to make bad decisions during an emergency.

photo credit: freedigitalphotos.net