How Do You Feel When You Have to Use Your Emergency Fund?

by Kevin on September 9, 2010

In my previous post I shared some strategies to deal with unexpected financial emergencies.

Today, I thought I would “get real” with all my readers. I’ll get to that in a moment, but first I was curious as to how you feel whenever you have to tap your emergency fund.

In other words: when your car dies, but you’ve saved up for car problems — how do you feel?

Do you feel relieved to have the money set aside?

Do you feel frustration because you were just getting on the right financial track, and now you’re taking a step back?

How do you feel initially when you discover the emergency? Is it different from how you feel after you’ve had time to sit and think about everything?

I Hate Using Our Emergency Fund

I’ve got to admit it. I hate using our emergency fund. Hate. It.

This may seem a bit odd for a person who has been writing on personal finance topics for the past (almost) three years. A blogger that has been telling you to save up money for years! But I hate using those additional funds.

I feel this way when the emergency first happens, and I still usually feel that way later on when I’ve had time to think about it.

It may seem really odd. I get it. I can logically walk myself through why I shouldn’t hate using my emergency fund. Nonetheless I still hate to touch that saved up money.

Our Car Emergency

In August of 2009 I reminded you that having funds saved up for car emergencies was important. That reminder came on the heels of my wife having a flat tire — a flat tire that led to the realization that all four of her tires needed replacing.

At the time we had a category in our budget for car maintenance. It was there to pay for our regular oil changes plus incidental incidents came up. When we had to buy new tires — cha-ching! — that category sat at a whopping $30.

Kind of hard to buy four new tires on $30.

So we had to dip into our emergency fund to pay for them. Ugh!

At the end of the month we were able to pay ourselves back because we had a great financial month.

But I still felt bad about dipping into those funds. I think I know why, too. Maybe this will help you understand yourself or your spouse better.

You Can’t Prepare for Every Possible Scenario

While most of you are thinking ,”Duh, of course you can’t prepare for every possible scenario in life”, I struggle with that thought.

I try to be prepared for as many possible financial scenarios as I can. It’s a losing battle because there is a limitless supply of things that could break or go wrong that I’ll never be able to prepare for.

But the financial nerd in me wants to be ready. And I feel like the few times we’ve had to dip into our emergency fund that I’ve failed to prepare. And that failure means I’ve failed myself and my family.

Does anyone else feel this way or am I alone?

You Can Prepare for Types of Scenarios

I’m not a nutcase that sits at my desk every day fretting about what horrible thing might happen that day. (I would need medication if that were true!)

What has really helped me is to not save up one giant pile of money and put one label on it: Emergency Fund.

Instead we have several different funds to cover certain categories.

For example, our emergency fund is technically a fund to cover our expenses if we both went without income for 12 months. It’s an lost income emergency fund. I’m not comfortable using that money to cover other issues unless we have no other choice.

So we have a car maintenance fund like I described earlier. We have a home maintenance fund. Things like that help me mentally separate the cash into boxes. Once I know that box has enough money in it I can stop worrying worry less about unexpected things that could pop up in that area.

But I do find myself consistently being reminded that there is simply no way to prepare for everything. I guess I’ll just have to get over that part… eventually.

I’d love to hear your thoughts on this. Do you hate to tap your emergency fund? Leave a comment below — and feel free to tell me I’m crazy!

(Photo by Rocchio)

Consider sharing this post with others via social media:
  • Tipd
  • Reddit
  • StumbleUpon
  • del.icio.us
  • Technorati

{ 3 comments }

How Do You React to Financial Emergencies?

by Kevin on September 6, 2010

We aren’t always financially diligent. We slip. We stumble. We spend money we shouldn’t spend and we don’t save the way we should.

But what if you’ve corrected those behaviors? You’ve started (or maybe finished) saving up an emergency fund of 6 to 12 months of expenses. You spend less than you earn.

In short, you’re making progress.

Before you have time to get comfortable disaster strikes.

Handling Financial Emergencies

The car dies. A tree falls on the garage. You break your arm. Your company gets bought out and lays off your entire division.

Frustrating emergency. Scary emergency. Painful emergency. Life changing emergency.

Just as soon as you were making financial progress an emergency pops up in your tracks. You slow down. You stop. You may even take a few steps back.

We’ve all experienced these types of emergencies. Some of us were prepared financially, some of us were not.

How should you react?

Breathe First

Stop. Before you do anything you need to breathe.

Our first reaction during an emergency is to do something, anything. It’s part of that fight or flight instinct deep within us.

A quick, rash decision that we haven’t put any thought into is not the right way to react to an emergency. Sometimes a quick reaction is needed to get you and your family safe and secure, but once you’ve resolved basic needs take a step back.

If you didn’t think it through you might rush to the bank to cash out that certificate of deposit (and end up paying an interest penalty) rather than realizing you had enough money in your budget to handle it this month.

Analyze the Situation

Take an honest assessment of the situation before making a huge financial decision.

Let’s use the car dying example. A rash decision would mean paying any price to get the car fixed. It would mean trying to find someone to fix it immediately. This weekend. Now. Over a holiday. Surely someone will take all of my hard earned cash to get me up and running for next week.

If you took a step back you might consider if the car was worth fixing. Or if you could wait until a non-holiday to get a diagnosis. Or if you were able to have someone diagnose it today that you wouldn’t be obligated to paying outrageous fees to get it fixed because you would get up front pricing that you could sleep on. If you absolutely needed wheels today you could rent a car or borrow one from a family member or close friend.

In other words you would look for other options with a clear head rather than emotionally reacting to what has happened. It’s a smart move.

Have a Plan to Fall Back On

The best way to handle any emergency is to have a plan in place for that specific situation.

Of course you can’t create an intense detailed plan for every situation that could pop up. But you can plan for the major disasters that could strike.

Here’s some emergencies to consider planning for:

  • income emergencies like job loss, pay cuts, or furloughs
  • house emergencies like appliances dying or structural issues like holes in the roof
  • medical emergencies that might require disability insurance (this also ties into income emergencies)
  • car issues like the battery dying, on going maintenance, or major engine or suspension part failure that would prevent you from getting to and from work

Of course you need to know how large of an emergency fund you need before you can make any plan. (And you did know that amount for one income families is different than two income families, right?)

Consider sharing this post with others via social media:
  • Tipd
  • Reddit
  • StumbleUpon
  • del.icio.us
  • Technorati

{ 0 comments }

How to Avoid Putting Reward Before Work

by Kevin on September 2, 2010

If you’ve been reading this blog for any amount of time you know I’m a huge fan of creating and sticking to goals. Financial goals, workout goals, writing goals… it’s all goals all the time in my book.

I definitely think goals should have some sort of reward aspect to them. The carrot on the stick, if you will. Yes, financial freedom, dropping weight, and personal enlightenment are all well and good, but you and I both know that a little extra motivation (“Oooo, a milkshake!”) can go a long way. Sad, but true.

But goals are hard. They are challenging. Sometimes we set goals so far above where we’re currently at they seem impossible to reach. These are our stretch goals. They force us to grow. Force us to get better.

Some of those stretch goals we will never achieve. They are impossible. That’s okay — we’ll end up better off just by seeking those higher expectations.

But sometimes there are goals that are achievable that we give up on. We get lazy. We get tired. We get distracted by the other things in our lives.

Even though we officially fail on reaching the goal we still end up giving ourselves the proverbial milkshake.

Avoid Setting Yourself Up for Failure

Shame on us. We’re putting reward before work. We shouldn’t do that, and I’m here to show you how. This definitely applies to your personal finance issues, but I’m sure you’ll find other uses for it as well.

Set Up SMART Goals

No, that’s isn’t a typo.

SMART is an acronym I’ve written about before (Don’t Let Your Goals Be Dumb). Each letter represents something that every single goal you set should have.

Goals should be…

  • Specific
  • Measurable
  • Attainable
  • Realistic
  • Time-Bound

Goals like “achieve personal enlightenment” or “achieve financial freedom” are actually terrible goals. How do you measure enlightenment? How do you measure financial freedom? Does it matter when you achieve the goal?

Asking yourself those type of questions will guide you in making your goals better, stronger, and in the end… more attainable.

Track Your Goals

You have to have some sort of system to track your progress toward your goals.

I’m a huge fan of using Excel (or OpenOffice) spreadsheets. They are dynamic and customizable to your individual tastes.

Others prefer automated systems that will gather data for you and display it with shiny graphics like Mint.com.

At the end of the day it doesn’t matter what I or anyone else says you should use.

Use a system you are comfortable with. If you try to force yourself into a system that you’re really not comfortable with the odds are pretty good that you’ll get frustrated, stop tracking your goals, not achieve those goals, and give up.

Reward Yourself After Success

This is a critical piece missing from the SMART acronym. (Maybe it should be SMARTR!)

Attaining goals is hard, right? It usually requires some sort of sacrifice. When you’re setting up your goal and tracking system, why not also go ahead and dangle that carrot in front of your face?

If I…

  • lose 20 pounds I’ll buy that new cellphone I’ve been jonesing for
  • get to 12 months of savings in my emergency fund I’ll take my wife out for a nice dinner
  • read 12 books this year I’ll buy that new computer game

The incentive of the reward in front of my face definitely keeps my motivated to continue on during the rough times.

What strategies do you use to stay focused on your goals?

Consider sharing this post with others via social media:
  • Tipd
  • Reddit
  • StumbleUpon
  • del.icio.us
  • Technorati

{ 0 comments }

The Debate of Using Credit Cards in College

by Kevin on August 30, 2010

College is kicking off this month at academic institutions across the country. Seniors are gloating their off-campus apartments. Juniors press on toward graduation. Sophomores are glad to have it all figured out. And Freshmen walk around campus attempting to look like they have it together while truly feeling dazed and confused.

And somewhere, usually in a large ballroom area, the bankers lay in wait.

A [Cheap Marketing Material Knicknack] for your Financial Loyalty

You know what I’m talking about. Banks line up with t-shirts, pens, koozies, mouse pads… you name it. Cheap marketing materials with their logo all over it.

These free things are for you! Honest! We like you so much we’ll give you a t-shirt and a book light!

Of course we do need you to sign up for our amazing, no interest for the first 60 seconds, 19.99% interest rate credit card to get this expensive marketing shwag.

The Risks of Using Credit Cards in College

A lot of financial damage has been done by inexperienced college students and their first credit cards. When you hand someone with no training a danger tool you can’t really be surprised when that same person ends up losing a finger.

Our society does so little to train the next generation on the tricks and trade of the financial industry that it really isn’t shocking that college students fall for credit card traps. The banks have a perfect market on college campuses: inexperienced clients with little free cash that want to impress as many strangers as possible.

The allure of this free money can be extraordinarily costly. Let’s say a college freshman signs up for a 19.99% credit card on his first day on campus. He decides to outfit his room and puts $5,000 on the card. He also decides to just pay the minimum until he pays off the charge.

That $5,000 charge will cost him $100 per month for 49 years and cost him $21,107. A costly financial lesson.

Our freshman wouldn’t be alone, unfortunately. A recent study by Sallie Mae showed 30% of students put tuition on a credit card, and only 17% paid off their cards in full every month.

The Benefit of Using Credit Cards in College

However, it’s not all bad news.

Let’s say our college freshman has been taught how to use credit wisely. He understands a budget. He knows he can only make so much pulling in minimum wage with his on campus job.

He, too, signs up for a credit card, but he doesn’t immediately blow his credit line on outfitting his dorm.

Instead he uses the card when he has money budgeted to spend, and pays off the balance every month. He continues this use throughout his college career and graduates not only with a high grade point average, but also a gleaming credit score.

That credit score will literally save him thousands of dollars throughout his adult life… if he can maintain that same financial discipline.

How?

Car loans, home loans, credit card, even his private student loans for graduate school… all will allow him to borrow money at much lower rates with his high credit score than if he had made poor financial decisions with that collegiate card.

What Should The Freshman Do?

Should the freshman sign up? Hold the phone — even if the college freshman wanted to sign up for a new credit card he wouldn’t be allowed to. The CARD Act prohibits people under the age of 21 for signing up for a credit card. That is, of course, unless they have a cosigner. That cosigner could be a parent, legal guardian, spouse, etc.

Is this a good thing? Possibly. But how many parents also have poor financial habits? How many parents will shrug and sign the papers without looking at the interest rate?

There is no blanket statement that can apply here. Some 18 year old college students can handle a credit card just fine. They’ve been taught the benefits and risks. (I was one of those students.)

Others shouldn’t even walk into the banker’s ballroom. The risk is far too great for them.

For each, personal introspection of their own habits and impulses should guide them.

Consider sharing this post with others via social media:
  • Tipd
  • Reddit
  • StumbleUpon
  • del.icio.us
  • Technorati

{ 2 comments }

← Previous Entries