Some surprises are great… but one surprise no one likes an unexpected expense. An unexpected expense can really wreak havoc on your personal finances. Unfortunately, unexpected expenses are extremely common, especially for those who own homes and vehicles.
For those of us who own large depreciating assets like vehicles, homes, boats, RVs etc., planning for unexpected expenses is an important financial habit. We need to prepare for future repairs and upgrades, even if they’re not entirely predictable.
At PlanEasy we call these types of expenses “infrequent expenses”. Unlike your regular monthly bills, infrequent expenses are not regular and are much less predictable. It’s hard to predict both the size and timing of infrequent expenses but they are still expenses that we need to prepare for.
If you own a depreciating asset like a home or vehicle then you can be guaranteed to have some large expenses in the future. To prepare for these expenses you need to set aside a certain amount of money each month, otherwise you’ll feel a nasty cash flow pinch in the future, or in a worst-case scenario, end up in debt. For those with a large home and 1-2 vehicles, setting aside $500 to $1,000+ per month is a pretty common goal. How much are you setting aside for infrequent expenses? Is it enough?
To manage these infrequent expenses, we can use a “fund” or “funds”. A fund is a small pot of money that you contribute to regularly. It’s set aside in a high-interest savings account and waits there ready to help when these types of expenses occur. We don’t like to think of this as savings, and its not an emergency fund, this is future spending that just hasn’t quite happened yet.
Remember when you were a kid and you didn’t have a care in the world? No responsibilities, nothing to worry about, nothing to stress over. Well you can get that feeling again, or close to it, by having an emergency fund.
An emergency fund, or “e-fund”, is amazing! An emergency fund is like a big financial blanket. It helps you stay warm and cozy during a rough financial storm.
You can also think of an emergency fund like a seat belt. Most of the time it’s just there doing nothing… but when an emergency happens your e-fund jumps into action to prevent serious financial harm.
An emergency fund is a pile of money you keep tucked away in a safe place in case of a financial emergency. Your pile of emergency savings should be equivalent to 3-6 months of living expenses, but it can be much smaller to start.
Emergency funds can be smaller if you have high interest debt (which should be a priority), or if you have a strong safety net (ie. parents, friends, relatives that can help provide support or help reduce expenses in an emergency).
Building an emergency fund takes time. It’s something you should contribute to regularly with each paycheck.
Emergencies happen from time to time so your budget should include monthly savings to replenish your e-fund.
To be honest, e-funds are boring. An emergency fund should be invested in a high-interest savings account earning 1-2% interest. This protects the principal but it can also feel very boring. In this case though, boring is good. Boring means that your money will definitely be there when you need it most.
It can be tempting to invest your emergency fund in the stock market…
What would you do in a financial emergency? What steps would you take? Do you have a plan in place?
It turns out that nearly 4 out of 10 people don’t have even a basic plan for a financial emergency. In the latest Financial Planning Canada survey, nearly 40% of respondents said they do not have an emergency fund.
While that stat is pretty alarming, the good news is that 6 out of 10 people are saving for an emergency, but is that the only thing you can do?
Our plan includes multiple layers of protection if we were faced with a major financial emergency. There are four key things that we would do. These four things would allow us to cover basic expenses for 5+ years! How’s that for peace of mind!
This 5-year “safety net“ wasn’t something that we created overnight, but we’re thankful we now have a strong plan just in case the worst were to happen. We hope to never get to that point, but it’s nice knowing we have a solid plan that’s ready to go in case things get really, really tough.
Here are the four things we would do in a financial emergency…
Feeling financially secure has nothing to do with how much money you have or how much money you earn. Feeling financially secure is all about how you feel about your finances, how you manage your finances, and your attitude towards money in general.
Financial insecurity is a very common feeling. It affects both low-income and high-income households, it affects both young and old. In fact, according to the most recent FP Canada survey, at least half of us are affected by financial stress in some way.
“Half (50%) of Canadians say that financial stress has impacted their life in at least one way, with health issues (18%), marriage/relationship problems (15%), distractions and reduced productivity at work (14%), and family disputes (13%) the most common ways stress affects them.” Source.
When talking about financial security, it’s important to differentiate between BEING financially secure and actually FEELING financially secure. It’s possible to BE financially secure but not FEEL that way. It’s possible to be in a great financial position but without the right knowledge, routines and plans, it may not actually feel that way.
In this post we’ve outlined eight things you can do to FEEL financially secure (even if you still have the exact same income, spending, and savings).
Out of all the ‘best practices’ in personal finance, emergency funds are probably the simplest and most effective. There is nothing easier to set up and nothing that provides more peace of mind than an emergency fund.
Emergency funds are boring, they are simple, and they hopefully never get used.
The purpose behind an emergency fund is simple. An emergency fund should provide quick access to cash in the event of an emergency. An emergency should be something truly unexpected like a job loss, a health emergency, an unexpected repair, an accident etc. Using an emergency fund for an expected expense is NOT the right way to use an emergency fund (more on that later).
Emergency funds can also be called an ‘e-funds’, ‘rainy day’ funds, or ‘oh $h!t’ funds. Whatever you call it, the purpose is the same, to help ease the financial burden during an emergency.
Yet, as simple as emergency funds are, they sometimes get used incorrectly. In this post we explore what an emergency fund is, how to set one up, how large it should be, and what NOT to do with an emergency fund.
Whether it’s a torrent or a trickle, having a system to manage cash flow can help make money easy. One of the most time-consuming things about personal finances is managing income and spending. But what if you had a budgeting system that helped you manage that monthly cash flow? And what if that system was free, easy to set up, and simple to maintain?
Managing income and spending is the best way to achieve financial freedom. It doesn’t take much to go from financial ruin to financial success. It can be as little as $10 per day. It’s not about stellar investment returns, or risky real estate investing, or earning six figure salary, it’s all about paying attention to income and spending.
But old methods of managing cash flow need to be updated for the digital age. Cash is less prevalent, and credit and debit transactions dominate. Any system for managing income and spending needs to be digital, automated, and easy to set up and maintain.
The envelope budget is a classic way to manage income and spending. It’s a proven way to manage cash flow and it’s easy to understand. Money gets allocated to certain envelopes and spent during the month. As money in an envelope gets low this provides a signal to slow down on spending until the envelope gets replenished on the next payday.
Thanks to no-fee online bank accounts, the envelope budget can be easily adapted to the digital age.
But it’s not as simple as just creating a few new bank accounts. To manage cash flow with the digital envelope budget system it helps if you have a budget already created. This may require tracking your spending for a few weeks or months. Or it may require looking at past statements. It also requires an online no-fee bank account.
This is how you set up the digital envelope budget system.