What do you do if you have an Emergency?

Lets face it an emergency can happen to anyone. Unexpected expenses can be a financial disaster waiting to happen.  Usually when an emergency happens you are stressed out enough with out having to add the financial stress of “How am I going to pay for this?”

So why put yourself in that situation?

As you have learned finances are in your control you have the power to cut out the fluff to make room for what really matters.  Do you want to have to deal with financial stress when your already stressing about some other emergency? NO!  Great! So lets get started.

Building your Emergency Fund Safety Net

Now I know there are lots of financial levels out there from the paycheck to paycheck to the savvy investor. This is for the beginners.

Level 1

This is for the paycheck to paycheck people. We have got to get out of this routine. Living paycheck to paycheck means you have no room or money to absorb any sort of financial emergency. This is a dangerous game to play. However, the good news is you probably have money to save it just keeps getting sucked up by you fun pile. So your challenge is save $1000, every month find a way to scrape together $100. Sure this might seem hard but its doable. You know that fun pile I mentioned it probably includes shoes, restaurant meals, clothes, lunches out, new gadgets, excessive driving. Lets say you go out every day for lunch at work and spend about $10. $10 x 5(days a week)x 4 (weeks)=$200. Take lunch to work 2 days a week and you’ll save $80.  Skip out on one dinner date out and instead prepare something new at home that is probably another $30. See $100 not so hard.  Now that you have it build it to $1000.  Remember this is not for a new TV.

Level 2

So you already save money, you pocket about $150 a month into your saving account. The problem is you don’t really have a safety fund because you keep using it to go on awesome vacations or buy new gadgets. Chances are you could probably handle a small emergency couple hundred dollars or so but you’d still be a fish out of water if you had a major expense or lost your job. Lets fix that. Your challenge is to save enough to cover 1 month of expenses. Your rent, Utility bills, insurance, car loan payment and so forth. Some expenses in your month are probably flexible like food, and entertainment. So you can adjust your spending in case of an emergency. For example cut down on meat  and eat more beans and rice and vegetables. But either way lets get you to an actual safety net. Your challenge is to figure out your necessary monthly expenses and save that amount. Put it somewhere and don’t touch it. IT’S FOR AN EMERGENCY. Then you can go back and start saving for that next trip you want to take. For now.

Level 3

This is the level we all really want to get to but it might be really daunting to those of us who live paycheck to paycheck. In this level you have cut your spending so much so that you automatically have about 25% of your earning free to save. Since you have breathing room in your budget you can absorb an emergency with out even needed to withdraw on your emergency account funds. Plus since you have extra room your emergency fund has grown steadily and is able to handle 3-6 months of your expenses and if you keep it up well its just going to keep on growing. However, in this stage you run the risk of sacrificing your opportunity cost. So figure out how much you need for 3 months and start investing the rest. You can always sell shares if your 3 month emergency blanket isn’t enough.( but that’s a different upcoming post.)

Finally

Finally I am currently checking out online banking. Some of you are probably veterans and well aware of that system so this is for the newbies. I know how comforting it can be to have your money in a brick and mortar bank, Like Chase or Bank of America but WAKE UP! those banks aren’t even paying peanuts for all the money you are going to start saving. Online banks at least offer a much higher rate. So do some research and test them out. (Post on that also up and coming). This will make sure you earn the highest interest you can on your safety funds.

Don’t wait for that horrible surprise emergency. You’re in charge of your finances so start today get the ball rolling.

What level are you in? How will you meet your challenge goal?