How to Emergency-Proof Your Life

Posted by in Budgeting, Saving, Tools

One Friday a few weeks ago Andrea and I decided to go for a couple’s massage.

While waiting in the “Tranquility Room,” a massage-y way of saying waiting room, I couldn’t help but overhear the conversation another couple was having.

Maybe it was my brief stint doing Intelligence work for the US government and the CIA guys I knew rubbing off on me, but I just couldn’t tune this couple out.

As best as I could figure, the boyfriend/husband had just lost his job or something right before coming in for their massage. And right then and there in the “Tranquility Room” he was trying to convince his wife/girlfriend everything would be okay.

He’d hustle to find another job.

He’d borrow some money.

He had a great idea for a business.

He’d get money back from people who owed him.

Meanwhile, his wife/girlfriend tried to bury her face in a magazine while he whisper-shouted a half dozen other money making schemes at her.

I’m not sure who I felt worse for.

The wife/girlfriend was clearly not thrilled. She was sighing, rolling her eyes, and angling her body away from her husband/boyfriend. I could tell all she wanted was some peace and quiet.

Possibly why she signed up for a massage in the first place.

Instead, she had to deal with her husband/boyfriend’s recent calamity and his untimely assurances he’d make things right.

On the other hand, here was this poor guy. Not only had he gotten some bad news on a Friday afternoon, but he was oblivious to how he was sabotaging his “relaxing, quality time” with his wife/girlfriend.

He was stressing out his wife/girlfriend by trying to convince her things would be okay. Then again…maybe he was just trying to convince himself?

I looked over at Andrea, oblivious to the drama unfolding across from us, and thought to myself: “Man, I’m glad we don’t have to worry about that kind of stuff. Thank God for our Emergency Fund.”

Ok, I admit.

I was feeling a little proud in that moment. Maybe even a bit self-righteous, I’m ashamed to say. But the fact remains, Andrea and I have effectively emergency-proofed our lives.

We’ve taken steps to make sure we really don’t have to worry about any financial surprises like job loss, car repairs, home repairs, medical bills, etc.

Right here and now, I’m going to show you how we did it. When we’re done, you’ll know how to emergency-proof your life and cut a bunch of stress and heartache out of your relationship.

Just like we did.  

You’re going to need 2 things to follow along with the rest of this:

1: Go get last month’s bank statement. If you’ve read about the time I got lost in Singapore or the tools and tactics we used to pay off all our debt, you know where to find this.

2: Download this handy tool I built for you. All you’ll have to do is plug in the information found on your bank statement from last month and in less time than it takes to watch an episode of The Real Housewives of Who-cares County you’ll know how to financially protect yourself and your family when something goes wrong.

Enter your email below and I’ll send you the tool.

What is an Emergency Fund?

Think of it as Bad-Stuff-Happens insurance. It’s money set aside you can get to quickly when, NOT IF, something goes wrong.

You’re going to lose your job. You’re going to get hurt. You’re going to need to replace or fix something expensive.

An emergency fund can help take the sting out of those days when your luck runs out.

Speaking for myself, it took me six months to land a good job after I left the Army. My Emergency Fund gave me time and flexibility to get through one of the worst job-markets of my life.

A couple years later, while Andrea and I were still working through our debt, I hit a patch of black ice and crashed my car head first into a tree. Thanks to our emergency fund, we were able to pay cash to fix my car instead of a credit card, avoiding more debt.

Around the same time, Andrea’s company screwed up and accidentally cancelled her health insurance. We were able to pay cash for a temporary health insurance policy to cover Andrea until I could get her coverage through my company. It took longer than we would’ve liked, but Andrea was covered the whole time.  

Bad. Stuff. Happens.

Expect it. Be ready for it.

How much is enough?

Some financial experts say to save $1,000 as an emergency fund if you’re just starting out. But I don’t like blanket statements like that. Your financial life is different from my financial life, which is different from Bubba’s financial life.

We need financial solutions to fit our unique situations.

I live in New England now, $1,000 won’t get me through too many emergencies. The last time I had sub $1,000/month rent, let alone expenses for groceries, utilities, and other “needs,” was when I lived in Alabama. In Alabama $1,000 would get me through most, if not all, tough spots.

Instead if you’re just starting out and have debt to pay off, set aside enough to cover one month’s worth of “Your Needs” in a separate savings account as an emergency fund. The key here is to get through your emergency without adding more debt.

One month’s worth of “Your Needs” will give you a good base to fall back on just in case something bad happens. If nothing else, it gives you a month to figure things out and come up with more money.

(It is easier than ever these days to make money quick on the side without a “job.” Check out Upwork, Uber/Lyft. AirBnB. Fiverr. Ebay, etc.)

Then once you’re totally out of debt, build up your emergency fund to 3-6 months worth of “Your Needs.” Whether you choose 3 months, 6 months, or more will vary depending on your specific situation. You can increase your emergency fund pretty quick once your debts are all paid off since you can save all that money instead of sending it to Visa or Sallie Mae.

Consider the following when deciding how big to make your full emergency fund:

  • Do both you and your partner make similar money, or is one of you the primary earner? If you both make similar money you can get away with a smaller emergency fund. It won’t hurt as much for one of you to lose your job compared to couples where one person is the primary earner.
  • How hard would it be to get a new job if you had to? How long does it take people to find new jobs in your industry? In some industries, you can lose/quit your job Monday and have a new one by the end of the week. In others, it can take weeks or months to find a new job.
  • How risky are your lives? What other things in your life have the potential to go wrong and cost a lot of money to fix? Does someone in your family have a medical problem requiring expensive treatment? Do you live in an earthquake, flood, tornado, hurricane, or some other zone you could experience the “wrath of God?”
  • What number would give you and/or your partner a warm, fuzzy feeling inside and let you sleep better at night? Don’t discount this question. One of the best benefits of a big emergency fund is the sense of security you’ll have, knowing you’ve proactively taken the sting out of downturns in your life.

Time to get to work

Let’s take a tour of the tool I built for you.

You already have your copy, right?

It’s a monthly budget spreadsheet I’ve already pre-filled with income and debt figures for an average, young American household. As we go through this sheet, use your bank statement to personalize it and update the figures with your own.

Let’s start with the top two rows.

Working left to right, look at “Months of Coverage.” I’ve set this to 1 month, just below, assuming you’ve still got some debt (mortgages don’t count). If you’re debt free, not counting a mortgage, change that number to 3 or more.img_1543

Next, check out “Emergency Fund Target.” Here the tool multiples the amount of money you spend each month on “Your Needs” by the “Months of Coverage” you want. This will tell you how much of an Emergency Fund you need. We’ll determine “Your Needs” in just a little bit.
img_1544

Enter however much you’ve got set aside for an Emergency Fund underneath “Emergency Fund Balance.” If you don’t have anything set aside in a separate savings account, leave this as $0.img_1545

Don’t worry, your “Emergency Fund Balance” won’t be $0 for long since you’re going to update this number every month.

“Save This Month” adds up all “Your Income” and subtracts “Your Needs” and “Your Wants.” The number there is what you’ve got leftover and is the amount you’re going to save this month.img_1546

All the way on the right you’ll find “Months to Emergency Fund.” This will tell you how many months, like the one modeled in this tool, until you fill up your Emergency Fund.img_1547

“Save This Month” is the most important number on this sheet. The bigger it is, the faster you’ll fill up your Emergency Fund and get to hit your goals. The smaller it is, the longer it’ll take and the more risk you’ll face. And God help you if it’s a negative number…

Your Income

Back and to the left you’ll find “Your Income.” This is how much money you and your partner get to bring home after taxes, employer sponsored retirement savings, contributions towards your health insurance or other benefits, etc. Just focus on your take-home pay.img_1548

Hopefully you know how much money you and your partner get to bring home in a month. If not, check your bank statement, pay stubs, accounts receivable, etc. Replace “Job 1,” “Job 2,” etc with your jobs and income. As you do, the tool will add it all up for you and update the rest.

Don’t worry if your income changes each month? Andrea and I had a mix of salary, hourly, and irregular pay so our monthly income was always changing. This tool will still work for you, it’ll just take an extra minute each month to update your income.

Your Needs

You need to eat. You need a place to live. You need to keep the lights on and water flowing. You need a way to get to work. I’ll even call cell phones and internet access needs. (Notice, I didn’t say premium cable and new iPhones every 6 months) Enter in “Your Needs,” we’ll come back to “Your Wants” later.img_1549

Notice the order I listed the needs. Food first, transportation second, then utilities, and housing last. When in doubt (especially if your income changes each month), this is the order you should prioritize your spending.

Paying your rent won’t do you a lot of good if you can’t eat. Your power company will cut your service quicker than it’ll take for you to get evicted.

Your Wants

We’re almost done.

You’ve updated the tool with your income. You’ve figured out what you need each month and how much you spend on them. Now, let’s talk about “Your Wants.”img_1550

Let’s be honest, there are things you and your partner are going to spend money on that could go towards your Emergency Fund. Stuff you don’t need to do, but want to and maybe even should.

Yes, the less you spend the faster you’ll have a solid Emergency Fund. But don’t pretend like you’re never going to hire a babysitter, eat out, or go to the movies.

I hope you’re going out on dates. I hope you’re having fun. I hope you’re giving gifts to each other. I hope you’re building in a bit of fun to your lives.

It’s just a question of how much money to spend on things you want.

This is where you and your partner will need to have a serious conversation. While “Your Needs” are going to be pretty consistent (and you actually NEED them), “Your Wants” are going to fluctuate.

The amount you spend on your wants each month will change. It’ll take you time to find the sweet-spot that allows you and your partner to live acceptable lives and have fun while still building up your Emergency Fund.

This is something only you and your partner can decide. I left “Your Wants” for last so you can see in real time how each of your decisions affects the amount of time it’ll take you to build up your Emergency Fund.

There’s more to handling money than math and this is especially true when discussing “Your Wants.” You’ll be discussing what your lives and feel like and this is where you’re most likely going to fight.

Stay focussed on why you’re building up an Emergency Fund in the first place. If you want more help, sign up for my free program to help you talk about money without fighting. This can be a tricky conversation, but it doesn’t have to turn into a fight.

Making it all work

Fill out this sheet and review it with your partner before the start of the next month. Then in a month, grab your bank statement and review how much you made and spent compared to your plan. Then make whatever changes you want for next month, updating dollar figures and adjusting however you see fit.

As you work through this tool with your partner, keep two things in mind.

First, “make more, spend less.”

Could you make some more money? I bet you’ve got a skill or knowledge someone would pay to learn or have you perform for them. Could you sell something? You’ve probably got stuff lying around someone else would pay for.

Could you spend less by negotiating a better cell phone and/or internet plan? How else could you save some money?

Second, remember why you’re building up an Emergency Fund. How would it feel to protect your family financially? What would you do differently if you knew you had some wiggle room. How much less stress and fear would you have if you effectively emergency-proofed your life?

Protecting your family with an Emergency Fund is one of the best financial moves you can make. It’ll remove a ton of stress and tension from your lives and save you and your partner a surprising amount of fights. You’ll have a greater sense of security than ever before and confidence to move forward in other areas of your lives.

But don’t just take my word for it…

Take Andrea’s word for it.

The stuff that my husband said is all very daunting. The step by step process is intimidating if you’re new at this. Don’t worry, though, it’s going to be ok.

I’ve found myself afraid numerous times. But I’ve always asked myself: Is it worth it to go through the fear of something requiring change? Or not change and not sleep at night due to financial uncertainty?

We spent the time and energy going through “needs” and now I sleep easier at night knowing we have an emergency fund in place that could sustain us for several months.

Just writing this now and imagining what it would be like if we didn’t have the emergency fund sends chills down my back. Taking control of your finances and building an emergency fund might not be a painless process. But it can save you a lot of pain in the future.

Also, I learned two new things about my husband in this article.

  1. He is a master eavesdropper in the tranquility room
  1. He doesn’t fully understand the part about being tranquil and shutting off the brain in the tranquility room. Do you or your spouse know anyone who fits this description?

It’s ok. You’re not alone….

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