Calling All Financial Voyeurs!
See Our Emergency Budget
Fee-for-service financial planner and founder of PlanEasy.ca
When you’re on a tight budget the fear of the unknown is very real. Any little bump can cause major issues. Things like an emergency fund are key to help avoid those issues. An emergency fund helps bridge the gap when cash flow is tight. More importantly however is that an emergency fund helps you worry less about the unknown.
Emergency funds aren’t the only thing that can help you worry less.
There are many things you can do to increase your financial flexibility and worry less about those unknown problems that come up from time to time.
One thing you can do is have a high savings rate. Having a high (+20%) savings rate will give you room breathe.
Another thing you can do is have more than one income stream. Having income from your job, plus investments, plus rentals/AirBnB, plus side gigs will help increase your financial flexibility.
Lastly, and this is what I want to share with you now, having an emergency budget will help you prepare for the bad times and worry less during the good times.
What Is An Emergency Budget?
An emergency budget is just like it sounds. It’s a personal budget that you use during emergencies. It’s your current budget with a 20-30%+ reduction in spending. It’s a “bare bones” type budget, it’s not sustainable in the long term but it can help get you through emergencies like a job loss or illness or if your emergency fund gets depleted quickly.
What is the benefit of an emergency budget?
An emergency budget can help you preserve cash during an emergency.
It can also help you replenish your emergency fund faster.
An emergency budget also provides peace of mind. It’s nice knowing that if the worst should happen you can survive on 10-30% less and that you already have a plan for how to do it.
Best of all, an emergency budget is something you prepare in advance, so if the worst should happen you don’t even need to think about what to do, you already have an emergency budget ready to go.
All this helps reduce your financial stress both now and if the worst should happen.
“An emergency budget can help you preserve cash during an emergency.”
Our Emergency Budget:
Our emergency budget is pretty simple. We can reduce our cash outflow between 10% to 40% depending on the severity of the emergency.
First, we stop all non-employer matched savings. We would try and keep retirement contributions intact to maximize employer matching because it’s essentially free money. Stopping all non-matched savings will help reduce our cash outflow by about 10%. This includes savings for our children’s education. We wouldn’t cut these long term but during an emergency we could reduce this cash outflow and catch-up later when things are better.
Second, we would reduce our “fun” money and look for no-spend alternatives. Depending on how large a reduction we wanted to make this could reduce our cash outflow by another 5-10%.
Third, we budget for home repairs each month in our budget. If faced with an emergency like a job loss we would choose to delay or forgo most home maintenance projects for a short period of time. This wouldn’t be a sustainable reduction, on average people spend about 1% of their home value on maintenance/upgrades each year. But for a short period of time we could reduce our cash outflow 5% by putting off home improvement projects. We could probably do this for a few years.
Fourth, we would reduce our food budget. We could probably cut our food budget by 10% with a few simple changes. This would reduce our cash outflow by a bit more than 1%. If we were in a really difficult situation, like job loss or disability, we would utilize local food banks to help reduce our cash outflow even further. Another 40% reduction in our food budget would let us reduce our cash outflow by about 5%.
Lastly, we would look at going car-less. If we were faced with an extended emergency we could sell our car and use public transportation. We already bike and use public transit for many errands so going completely car-less would be doable but difficult. This could reduce our cash outflow by another 5-10% depending on how much we would use public transit.
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An Emergency Budget Gives You Options:
At the most extreme, our emergency budget could reduce our cash outflow by 40%. This would mean implementing all spending reductions in our emergency budget. This would help our emergency fund last almost twice as long but it would be difficult. This would be a drastic action and would only be something we consider in the most dire circumstances.
A less severe reduction would be in the 30% range. This would be easier to sustain for a period of time.
Just making some quick changes would help us reduce our cash outflow by 10-20%. These are easier changes to make and would be our first step during any financial emergency.
Having these options feels great. These options are ready to go in case of any emergency.
Going through a financial emergency is stressful enough. Having an emergency budget prepared in advance can help reduce that stress. There are no decisions to be made. Just pull out your emergency budget and put it into action!
Financial planner, personal finance geek and founder of PlanEasy.