Let’s decide if the amount of emergency funds you saved is enough.
Three Months’ Income Banked
You have the bare minimum for an emergency, but not enough for a catastrophe.
- Continue aggressively saving money.
- Employ some cost cutting behavior to increase the amount you can save.
- Avoid emergencies.
Emergencies are not planned, but you have some ways to keep them at bay. We will cover those last.
Six Months’ Income Banked
Choice time: Head for a year’s income banked or switch to a war on debt. You have proven your ability to save money and have a good safety net in the event of financial disaster. If you keep doing what you have been, you may have some great peace of mind, but is that what is best for your emergency preparedness?
Consider this: If you lost your job today, would a good portion of your emergency fund go toward unsecured debt (credit cards or personal loans)? Is your unsecured debt larger than your emergency fund? If you answered “yes” to either of these questions, time to switch gears.
Knock Out Consumer Debt
Take the amount you were banking in your emergency funds each month and use it to pay down debt. Here is the formula:
- Remove one credit card from your wallet.
- Place it in your emergency fund hiding place (which means do not use it).
- Take 3/4 of your monthly savings and split it evenly between all of your credit cards and personal loans on top of what you would normally pay.
- Take the remaining 1/4 and pay it toward the smallest of your secured loans (car, mortgage) on top of what you would normally pay.
- You have stopped incurring debt with one card.
- You are reducing interest penalties by paying down your consumer debt faster.
- You are rapidly reducing your secured debt.
If you eliminated just one payment per month on credit cards, personal loans, a car loan or mortgage, how fast could you save one month’s income?
Stave Off Financial Disaster
“If I planned it, it would not be an emergency.” Yes, you are right. You can take some important steps to keeping your emergency funds in tact.
- Keep your air conditioning/furnace serviced and maintained between servicing.
- Change your oil every 3,000 miles or 3 months (whichever comes first).
- Have routine tire, fluid and filter checkups on your vehicles.
- Make the exterminator a regular visitor to your home. Termites cause billions in damage.
- Immediately repair damage in your home.
- Keep appliances clean and machines (lawnmower) in running order.
- Go to the doctor four times per year. Discuss everything.
- Keep your appointment with the dentist for routine cleaning and checkup.
These are all examples of an ounce of prevention is worth $1,000 repair bill.
What are some of your emergency preventing routines?
See all posts in the Emergency Funds Series.