By: Terry McCoy, Senior Training Specialist with Amplify Credit Union
There are really only two ways to live: like there is no tomorrow or like there is actually going to be one. For the record, at least to date, there has always been one and, as sure as there is going to be a tomorrow, that tomorrow is going to bring with it unforeseen expenses. What, then, is the plan for dealing with them?
The no-safety net lifestyle
The option that too many people choose is simply to let the chips fall where they may; the "what-me-worry?" approach to life. This means that when something comes up, they may or may not have the money on hand to deal with it. Major car repairs, medical bills, appliance breakdowns – any number of things can happen suddenly and without warning, but they say, "We'll deal with it when the time comes." Why is that?
There are reasons not to have a safety net
But are they reasons or are they excuses?
- It's no fun
Agreed, it would be a lot more fun to take that extra money and throw a memorable party or go on a shopping spree than to set it aside for an unexpected expense that, as of this moment, only exists in the imagination.
- We're strapped as it is
Heck, yeah; life is expensive.
- My significant other won't participate This is one of the major roadblocks to any family budgeting program. If one partner always feels that the other is working at cross-purposes to the safety net-building endeavor by continuing to spend money as they did before, it can lead to a serious rift in the relationship. Both parties have to be on the same page or, in worst-case scenarios, they might get into a spending war just to spite each other, and that does nobody any good.
The consequences of not having a safety net
A person has convinced themselves that it's just not feasible (or desirable) to have a cash cushion. What now? Well, if that person lives a charmed life, it will never matter. If, on the other hand, they are like 99.9 per cent of the rest of the population, they will face a number of situations that demand immediate financial action outside of their normal spending routine – and that's where it gets difficult.
With no money on hand to throw at surprise problems, people must compromise their futures to deal with these situations. Expensive, high-interest loans, additional credit card burdens and borrowing from friends and family become the work-arounds of choice when the chips are down. The irony of this is that the people who couldn't see their way clear to create an emergency fund before the emergency are now far worse off. The long-term costs can be staggering, as the reality of falling behind on payments will negatively impact credit scores and make future borrowing even more expensive.
Not all surprises should come as a surprise
Sure, there are events in life that nobody can foretell (which is why an emergency fund is so important). On the other hand, there are expenses that seem like shockers, but are actually predictable. The age of items such as roofing, fencing, tires and appliances are knowable, as should be the approximate time of their demise. By including obsolescence into the family budget, replacements and repairs on certain items will not even come under the category of emergency spending.
Budgeting for a safety net
So, where does the money for this safety net come from? It starts easily by discovering what money-saving tips might work for you, like automatic salary deductions that will become so routine that the money will not be missed. If it is never seen, then it cannot be missed. Certain things can be done without – at least until an acceptable amount of money has been put aside. There's no reason to live in a Spartan manner indefinitely.
How big should a safety net be?
- The half-year safety net solution
Ideally, you should have enough cash on hand to get you through a six-month crisis such as a job layoff or a medical situation. This means you set aside enough money to cover your utility bills, insurance, rent/mortgage and food for half a year. Would it take a great deal of forethought and a good amount of sacrifice to make this happen? Yes, it would; but imagine how much peace of mind it would buy you.
- The quarter-year solution
If a six-month cash supply seems out of the question, halve that and stay prepared with enough money to tide you over for three months. Preferably, your life will get back on track in those three months and this will prove to be enough to get you by. If not, it will at least delay the phase where things start to get financially challenging.
- The grand solution
Still can't get your head around putting aside that much money for a what-if scenario? Then, at the very least, having one thousand dollars on hand for emergencies is a great place to start. Sure, it wouldn't be enough to counter a job loss or replacing a vehicle, but it would mitigate the sting of a big car repair bill or a broken air conditioner in the high heat of August without disrupting your everyday budget.
Once you have it, don't be afraid to use your safety net
It can be painful to have to dip into your fund when a genuine crisis arises; after all, that fund represents a lot of hard work and sacrifice. Remember, that's what it's there for. It exists to bridge you over an emergency financial situation. When the crisis has passed, start building it up again for the future.
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Terry McCoy has spent over 25 years in the credit union industry focused in the lending area in both New York State and Texas. He has spent over 16 year at his current credit union, Amplify Credit Union, in dual roles as Sr. Training Specialist and Sr. Credit Analyst.