Any good financial coach or writer will tell you that one of the first things you need to do when you start taking control of your finances is to build up an emergency fund. I wrote about what an emergency fund is and what to use it for here. To sum it up, your emergency fund is for unexpected expenses that pop up due to unforeseen circumstances. When those circumstances arise, you can then decide to tap into your EF. When a circumstance arises that has long-term financial consequences, you may also need to resort to switching to your emergency budget.
What Is An Emergency Budget?
An emergency budget is a budget that you set up when you need to cut out ALL unnecessary expenses in order to survive. It is something that you should have in place as soon as possible, as emergencies don’t wait until you are prepared to occur. Emergencies that could cause you to switch over to your emergency budget are job loss, major home damage, unexpected medical expenses, the IRS knocks on your door, you lost your car in a street race for pink slips, freak gasoline fight accident, or any number of high dollar emergencies. If you find yourself in one of these unfortunate circumstances, you need to be prepared.
How To Create An Emergency Budget
Ok, so now that you have gone through my budgeting basics and created a budget, you’re all set to create your emergency budget. I suggest sitting down with your significant other to come up with what stays in your budget, and what gets tossed to the curb. Here are some general rules to follow when creating your emergency budget:
- Get rid of your savings buckets. If you have savings categories for things like vacation, Christmas, gifts, car maintenance and home repair, I suggest removing those first. You can live without them while you are in emergency mode. I even suggest removing car and home savings because you need the money to survive, and most homes/cars can go at least 6 months without need for maintenance.
- Reduce or remove spending cash. Depending on how bad the emergency is, I suggest greatly reducing , or even removing this category. You can’t spend money that you don’t have, and you also don’t want to go broke quicker because you can’t resist the Dorito Taco at Taco Bell.
- Reduce your food budget. I know, I know, this is not easy at all. But if you lost your job, you WILL find a way to remove $50 from your food budget, even if you don’t eat quite as healthy while you are dealing with this emergency. No sense in actually going hungry because you “needed” your organic pine nuts.
- Find alternate transportation. You’ve been meaning to take the bus or carpool for a while now, what better time to make the switch than when you can barely afford to drive. It may be a pain in the rear, but you need to save that gas $$$ to survive.
- “Know where your towel is“. For those who aren’t nerdy enough to get the reference, it’s just a way to make sure you “Don’t Panic!” Yes, things will be VERY tight. But, humans have the amazing ability to adapt when the going gets tough, so just know that you WILL make it through, and this budget is NOT forever. Take comfort in know that you at least have a plan in place. And hey, at least the planet is not being destroyed by Vogons.
Sample Emergency Budget
|Item||Regular Budget||Emergency Budget|
|Income||$ 4,000.00||$ 2,500.00|
|Mortgage||$ 1,500.00||$ 1,500.00|
|Electric||$ 75.00||$ 75.00|
|Natural Gas||$ 75.00||$ 75.00|
|Cell||$ 100.00||$ 100.00|
|Internet||$ 45.00||$ 45.00|
|Car Insurance||$ 100.00||$ 100.00|
|Student Loan||$ 200.00||$ 200.00|
|Food||$ 300.00||$ 240.00|
|Gas||$ 200.00||$ 125.00|
|Date||$ 80.00||$ –|
|Spending Cash||$ 60.00||$ –|
|Pet Food||$ 40.00||$ 20.00|
|Water/Sewer||$ 60.00||$ 60.00|
|Garbage||$ 30.00||$ 30.00|
|Car Maintainence||$ 50.00||$ –|
|Vday/Anniv.||$ 50.00||$ –|
|Christmas||$ 50.00||$ –|
|Birthdays||$ 30.00||$ –|
|Vacations||$ 100.00||$ –|
|Beauty||$ 35.00||$ –|
|Leftover||$ 820.00||$ (70.00)|
As you can see, job loss can GREATLY impact your monthly budget, and for most people, would send them into a panic. BUT, you have now created an emergency budget and instead of being $680 short every month, you are now only $70 short. To put that in perspective, you would drain your $1,000 emergency fund in less than two months and have to start missing house payments, but with your emergency budget in place, your $1,000 emergency fund will now last 14 months! So if you haven’t already, sit down, talk it out, and put an emergency budget in place. Now, when an emergency arises you can still sleep at night, knowing you have a contingency plan to weather the storm.
Comments: Do YOU have an emergency budget in place? Have you ever had to use it? For those without one, have you ever had to deal with an emergency that impacted your monthly budget? How did you deal with it? I wonder what Nicholas Cage did when the IRS knocked on his door….?