Do you need help on how to establish an Emergency Fund?
Here are some ideas!
I love statistics! Now what do I mean by that? The National Endowment for Financial Education has research that reveals there are four (4) major areas that we can face the need for that emergency fund. At the bottom of this post is the link to the report. In this case those statistics can help us to know how to prioritize our emergency fund.
According to their report 60% of us will have one of these four emergencies hit us in a year. Yet, the research reveals that only 40% of us have emergency access to even $1,000 to cover such emergencies.
Here are the four areas that we need to be prepared to happen.
1. Vehicle problems - 20% will have this happen in a year.
Solution – Access your vehicles for the following factors.
a. Warranty – Does your vehicle have a warranty or an extended warranty?
b. Age- How old is your vehicle? The older the vehicle the more likely for repairs.
c. Mileage – What is the mileage of the vehicle? The higher the mileage the more likely repairs are needed.
d. Does your vehicle have standard maintenance that is needed to keep the vehicle in working order? Have you done them? An example is the timing belt it has to be replaced at a certain mileage or the engine will be destroyed.
e. Estimate [always best to estimate high] the cost of a major repair and/or deductible that you might face. Keep that much in the emergency fund for the vehicle.
2. Home Repairs – 19% will have a problem needing a home repair.
Solution – Access your home warranties
a. Minor Repairs
i. Review your appliances
1. Did you purchase it on a credit card? There might be a warranty involved.
2. Do you have a home owner’s warranty? Does it cover appliances?
3. What are the ages of the appliances?
4. Make a list of the ones that will need to be repaired. This way you can set funds aside and start watching for a buy to replace it before it completely quits. Replacement on your time schedule is the key.
b. Major Repairs
i. Review your home owner’s insurance?
ii. Learn what it covers.
1. Review it with the age and value of your home in mind.
a. Does your home owner’s insure need increased? This is one way of preparing and cut the costs or those unexpected costly repairs.
b. Does the deductible need increase? Another way of planning for the future.
c. Does the policy cover current replacement costs? Consider this.
c. Establish an estimated amount that you need to cover a major and a minor repair and/or a deductible you would need to pay. Keep these costs in the emergency fund marked for home repairs.
3. Medical Care – 16% will have a medical emergency.
Solution – Access your healthcare.
a. Review your healthcare policies.
i. Know what they cover.
ii. Review your family history in regards to health. Questions such as:
1. What were our ancestor’s health issues?
2. Do the policies cover those conditions?
3. What can I do for prevention of those conditions?
iii. Access your healthcare needs.
1. Are we doing regular checkups and tests?
2. What exiting conditions does the family have that require extra healthcare costs?
b. Estimate the costs needed to cover insurance deductibles and surprise healthcare issues.
c. Keep that much in the emergency fund specifically targeted for those needs.
Source: U.S. Bureau of Labor Statistic
4. Job Loss – 11% will face this difficult situation.
Retirement could be a planned “job loss”.
Solution – Develop a Strategy!
Understand Strengths, Weaknesses, Opportunities and Threats (SWOT), Have Multiple Revenue Streams of Income, Reduce Living Costs.
a. Do a SWOT for your industry/employer/business.
i. Review each area of the SWOT for your industry/business. Are there signals that reveal your industry is changing? Where is your employer/business at in relationship to the SWOT?
b. Do a SWOT of yourself.
i. What are your strengths?
ii. What are your weaknesses?
iii. What are your opportunities?
iv. What are your threats?
v. The goal is to turn Weaknesses into Strengths and Threats into Opportunities.
c. With the information what can you do to improve your marketability?
d. Use the business principles of increasing income.
i. How can you increase your revenue through multiple streams of income?
ii. Review side opportunities to increase cash flow.
1. Hobbies that can generate cash.
2. Collections that can generate cash.
3. Part time side employment.
4. Run a small business from the home.
iii. Be careful of the pitfall of having all family members working for the same organization. If it is a large organization, be sure to work in different areas of the organization. The key is to keep the whole family from losing their jobs at one time.
e. Reduce Living Costs – Business does this second after increasing income.
i. Review unemployment.
1. How much would you collect?
2. How long does unemployment last?
3. How much would be needed after unemployment to meet expenses?
4. Place in the emergency fund enough funds to make up the differences for 1 month at first, then 3 months, 6 months and ideally 1 year.
ii. Evaluate your expenses in what is called “line by line” budgeting in business.
1. Review each expense and ask how can I lower or eliminate this expense.
2. Include a “slush fund”. Life is never as exact as we would like.
iii. Establish a realistic budget.
1. Bring the whole family into the process.
2. Have a plan.
3. Evaluate it weekly.
4. Establish milestones.
5. Reward the successes.
f. Inventory your home.
i. What items are not used or will not be used in the future. Consider selling them to raise cash or at least know their value. Look at each item as cash in a saving account.
ii. Don’t fall into the trap of “Oh look what I have found we have not used it for years. Let’s sell it.” Evaluate if this is really an unexpected “opportunity”. You might need it in the next month guaranteed. J
5. Surprise Opportunities – This was not covered in the report. Yet, I believe this is just as important. An emergency fund needs to include opportunity as well as disaster. J Every year there are purchase opportunities that will surprise us at substantial savings or a way to increase cash. The key is to have the funds available to be able to make the purchase.
Solution – Review your needs that you would like to have that would improve you and your home’s needs.
a. Make a list of items that you would really like.
b. Make a list of experiences you would really like to enjoy.
c. Watch for opportunities to buy an item to sell at a substantial increase now or as a “savings account” for the future.
d. Set an estimate amount of money in the emergency fund marked specifically for opportunities.
6 Review your wealth in three (3) categories - Cash reserves, Items, Real Estate. Place values on each. Then try to keep an even balance between these three categories. You will see your wealth from a different perspective. Anciently this was part of budgeting.
The real key is to realize planning takes some time. Set goals. Establish rewards. This way the future need not be so “emergency” driven.
Now to put my “money where my mouth is” I will tweak my own budget.
Best of Luck on Budgeting for the Emergencies and Opportunities! Judy
Here is the report:
Pictures came from the above report and google images.