Saturday, 21 August 2010

The “Money Makeover” – The Emergency Fund I

OK, so we've looked at creating our budget, and we have set up our "allocated savings". We have been using this for one month. If you are anything like me, you may have found:

  • You missed a few payments on your original budget and needed to add them to next months.
  • It incredibly hard to stick to the plan and spend only the money you had budgeted.
  • Think that this is all impossible since the slightest deviation from the budget causes problems.

This is where our first key milestone comes in, the emergency fund 1. The idea here is that this is going to be our buffer against those surprises that blindside us and knock us off our important financial journey.

What is the "emergency fund 1"?

Put simply, it's £1000 (or equivalent in your local currency). This should be enough to cover most common emergencies that may arise. Now, I know what you are thinking "OMFGWTFBBQ?! A GRAND! If I could save a grand I wouldn't bloody be here!".

... And you are probably right, but we have also proven we can't save a grand because we always spend it (and then some). So, let's begin shall we?

Getting Started – Attitude Adjustment Required!

This milestone is very simple in concept, but hard to digest because we are not used to having cash around. This is also likely to be the first “chunk” of cash to populate your “allocated savings” – and, if you are anything like me, you are going to look at those zeroes and think “OOOHHH LOOK AT THE COOL THINGS I CAN BUY NOW”.

We can’t do this. And we WON’T do this! The money makeover demands it!

That is my first tip – give the money makeover some character. Give it a name. Call it out. When you give it identity, you will feel like you are letting someone (as opposed to something) down when you fail to stick to our goals. I always joke about it “nope – can’t do that, Mr Makeover says ‘no’”. We need to really get our heads around the fact that we are doing this makeover for a really, really good reason – we want our money back.

If we fail, we let ourselves down, but perhaps worse, we are letting our future down. Who in their right minds wants to shoot themselves in the foot when we can prevent it??

“Emergency”

Repeat after me:

  • An iPad is not an emergency.
  • A holiday is not an emergency.
  • Christmas is not an emergency.
  • That new pair of trainers is not an emergency.
  • That new cell phone is not an emergency, even if your current phone is dead.
  • Bobs leaving party is not an emergency.
  • Catching up with that friend from school is not an emergency.

What I am trying to do here is make you think, what is an emergency?

Struggling? Yeah, me too. The truth is this, there are VERY few things that should actually constitute an emergency. For me, I could only come up with two real things that I thought were truly important enough to constitute an emergency:

  • Urgent medical/dental treatment that I have not had a chance to prepare for.
  • Large, unexpected bills that I have not had a chance to budget for.

What do you notice about these things? I could have prepared for them – and we will be, in the future. However, at this point we are just getting started, and it is going to be some time before we get to that, so we need to create a buffer just in case something happens before we get there.

Creating the Emergency Fund I

As said before, this is dead simple. The emergency fund I is just £1000 in your allocated savings.

However, we should save this as fast as possible – the sooner we are protected from unexpected turns of events, the better.

So, put every spare penny you have towards it, work some overtime, sell some of that crap you never use, stop eating out, have one less beer – do whatever you can to funnel as much into your allocated savings as quickly as possible.

Then What?

Do nothing, leave it in your savings account. When an emergency comes, transfer it into your cash account and make use of it.

BUT, then replace it as quickly as possible again! We must maintain this fund at all costs!

This is our first line of defence, therefore the most likely to get used – we need to make sure it is well stocked to support us whenever it is called upon.

If you don’t find yourself using it, fine – leave it there. Remember, we are not using this for the expected, but rather using it to protect us from the unexpected. Just because you didn’t touch the emergency fund I this month, don’t expect the same next month.

In Summary

I remember when I completed my emergency fund I – it felt like such an achievement! This was the first time in years that I actually had any “real” amount of savings (that lasted longer than a month). It felt great, and it still does – having the safety net really does help take a lot of stress away.

Sure, at this point, it can be hard, since we still have other debt and we have a grand sat here that we could put towards it – don’t be tempted. Remember, this is a safety net – and as with real safety nets – we should hope that we never have to use them. It’s a failsafe,  not a tool for daily use. Don’t panic, we will be getting to that debt soon enough.

As well as giving us the safety net – pooling money into this fund is a great primer for “funnelling cash”  - we are going to be doing this a lot over the coming months/years (depending on how much debt we have) in order to dig ourselves out of the hole we put ourselves in. Learn from it – push yourself. Find money where you couldn’t find money before.

All of the above aside, it’s nice to have a little bit of interest being earned rather than charged for, don’t you think?.. ;)

1 comment:

  1. Totally agree. Emergency fund saves your live from a bill from the hell.

    ReplyDelete