5 Steps for Surviving a Financial Emergency
We talk a lot about preparing for unexpected expenses. And well it should. In a survey by Bankrate, almost half of Americans had a financial emergency last year, yet only three in five adults could pay for an emergency out of savings. The typical financial emergency, by the way, costs about $2,000, according to a survey by the Pew Charitable Trusts. But what about saving for large, expected expenses, like moving or buying a new home? My family is preparing to move across the country; we’ve known about this since last September. We’ve been saving money for almost a year, and yet we’re still struggling to finance everything out of short-term savings. Here are some things we should have done, mostly taken from Kiplinger.com’s “7 Smart Ways to Build Your Emergency Fund.” 1. Pay Yourself First Everyone that promotes savings recommends you set up an automatic deposit to your savings account. If you’re paid by direct deposit, ask your employer to add another deposit into savings. One rule of thumb is the 50/30/20 rule, which suggest you use half of your income on fixed expenses, like utility payments, 30 percent for discretionary expenses, like food, and save 20 percent: 10 percent toward retirement and 10 percent to short-term savings. We didn’t do that. Instead, every time we had a bit of money left over after we paid all our expenses we put it into savings. Guess how often that happened. 2. Use Your Income Tax Refund The average income tax refund is $3,000. That’s a great start for a short-term savings account. We actually did this. However, we couldn’t save everything. Last year our family van broke down yet again. (I should plan for it; this is an annual occurrence.) We covered its repair cost out of savings. Then we had another family emergency, and we had nothing left. So we used a credit card to cover that one. We used most of our income tax refund to pay off our credit card. That’s a good thing, but if we’d saved more last year, we wouldn’t have needed to. Of course, if you get a tax refund you could also reduce what the federal government withholds from your paycheck every month, so you’re not giving the government an interest-free loan. Kiplinger.com has a calculator to help you determine how to do that. 3. Reduce Your Outlay Jim Wang, the founder of personal finance blog WalletHacks.com, told Credit.com he “played house” before he bought his first home. He first figured out what his monthly mortgage would be – about $1,500 – then decided to spend like he was paying it. He’d pay his $600 per month rent then put $900 into savings. He had to cut back on other expenses by going out less, cutting fixed expenses like cable and reducing his savings in other areas. When he bought a home he was able to live within his budget, and he had an extra $10,000 for the down payment. Admittedly, with children, it’s more difficult to reduce outlay. However, I could have pre-cooked and frozen meals so we could have eaten those on the many nights when I didn’t have time to cook. A story in USA Today estimated that people spend more than $1,000 a year on dining out. That would have been useful now. 4. Bring More In Consider a part-time job. Or try these money-generating ideas in this story from Kiplinger.com. My husband requested all the overtime he could. But most of what he earned went for small emergencies like car repairs. (I hate our vehicles.) I tried to pick up additional work. Since we’re downsizing anyway, we’re also selling many things we don’t use anymore. I just traded in a bunch of movies we never watched to Amazon.com. Admittedly, we got pennies on the dollar, so if you know of a way to get more from your old movies, games and books, please let me know. But still, it was nice to get a tiny bit of money for things we needed to get rid of anyway. 5. Finally, Start Small Paul Golden, a spokesman for the National Endowment for Financial Education in Dallas, told Bankrate that saving six months-plus for emergencies isn’t feasible for most people. But he suggested saving anyway. "Even $500 has been proven to have a psychological benefit," he told Bankrate. "It improves people's psychological well-being and shows you have the ability to set (and meet) an achievable goal." Also consider the 52-week savings idea. Save $1 the first week, $2 the second, $3 the third and so on. By the end of the year you’ll be saving $52 per week and you’ll have almost $1,400 in savings. I wish we’d done that.