Everyone who reads this site has heard a thing or two about the importance of having an emergency fund. But when such an emergency comes along, how do you use that money wisely?
Erin Lowry a.k.a. Broke Millennial recently asked on Twitter:
Does anyone do a “doomsday prepper budget”? To clarify, not actual doomsday, but you’re ready if you got fired/self-employed and going through down months and need to cut everything down to the bare essentials.
— Broke Millennial (@BrokeMillennial) May 24, 2019
Some emergency expenses amount to a one-time inconvenience: a flat tire, a chipped tooth. But if the emergency is going to have an extended stay in your life, it’s time to turn to your doomsday budget.
Doing so can help you go into autopilot during a stressful time. Instead of thinking about how you’ll stretch your money to cover an emergency period, you can open up Plan B or C or D and simply follow the instructions you left yourself.
If you’ve never thought about the big what-ifs before, here’s how to think about them without having a full-on panic attack that leaves you wheezing on the floor (no guarantees, just cautious optimism here).
Do not wait for an emergency to manifest itself
If you go through the month merrily ticking off the number of times you get paid without worry, stop doing that and start thinking about the worst-case scenario.
What happens if you lose your job? If your partner loses their job? If you suddenly have to pay for your own insurance, or have ongoing medical expenses? If the car gets totaled and the check from the insurance company is smaller than desired? If your partner falls in a hole?
Sorry to be That Person, but if you’re in one of the above situations, the last thing you’ll want to have to do is say “Honey, where should we trim the budget now that you’re trapped in the sinkhole in the yard for the foreseeable future?”
Do it now to avoid a mad scramble later on. You’ll need to tweak once you’re in a situation where the emergency budget is needed, but you’ll know enough from your preparation to move forward with relative ease.
Make a duplicate of your current budget
If it’s a spreadsheet, make a copy. If you have it all stored in an app, write it down (digital or analogue, your choice). This is where you can play with the numbers to see how long your emergency fund could last if you need it to float you for a while.
If you want to play with multiple scenarios, you can make infinite copies of your budget and start cutting. But maybe start with one alternate version first.
Go through your subscriptions
Which are easy to cancel? Perhaps you can pause your monthly payments for Netflix/HBO/Spotify/Foxtel etc. for a little extra to get you over the hump.
I’m not advocating for spending half a day on the phone with your internet/TV/mobile phone company or gym if it’s going to be a huge hassle. If you know how to adjust your service or you’re not stuck in a terrible contract, you may want to consider axing these in the event of financial misfortune.
Review your “fun stuff”
If your budget has lines for dining out, gifts, charity, or shopping for clothing, see what happens if you cut those categories down to zero.
You may still grab takeout or buy a gift from time to time, but reducing those line items dramatically can make a difference during hard times.
Cut debt payments down to the minimum
Car, house, and student loan bills still have to get paid, but if you’ve been paying extra, you can dial back your go-getter moves for a while.
Evaluate your savings habits
If you have automatic transfers set up into savings or brokerage accounts, you can turn those off in order to have extra cash.
If you have regular contributions going into a retirement account, you can stop those, although I personally would advise this as a last resort. Present-day stressed-out you owes it to future stressed-out you.
Review your doomsday budget every time you update your regular budget
Once you’ve sliced and diced your budget, you can divide your emergency fund amount by your monthly expenses to learn how long that money will last.
This is the least fun activity to do in your brief leisure hours, but please let me be the first to tell you it’s worth your time. When I was laid off this spring, one of the first things I did was open my budget spreadsheet, make a copy, and start hacking away.
It gave me peace of mind to know that I could float for a few months while searching for a job, but it would have been even better if I hadn’t had to think about it immediately at all, and could let myself wallow on the couch watching HGTV in a daze for a few more hours (days).
Stressful situations aren’t the best time to suddenly rejigger your entire budget. Do it before an emergency happens.