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by Kristin Wong<\/p>\n
via TwoCents<\/a><\/p>\n <\/p>\n You\u2019ve probably heard of an emergency fund.<\/em> It\u2019s a small cushion of savings to help you stay afloat in case of a financial crisis. For some emergencies, it also helps to use an emergency budget\u2014<\/em>a deflated spending plan to make sure the money in your fund lasts as long as possible.<\/p>\n Most experts say you should have between 3-6 months\u2019 worth of living expenses in an emergency fund. Some emergencies are small. A $500 car repair, for example, should only be a small dip in your fund<\/a>. But then there are bigger emergencies, like losing your job. Your emergency fund is meant to help you get by for awhile in those situations, and you want it to last as long as possible, since you don\u2019t have a steady stream of income. That\u2019s where an emergency budget<\/em> comes in.<\/p>\n When you\u2019re living off of your emergency fund, you want to keep your living expenses as low as possible. It won\u2019t be a fun budget to stick to, but you\u2019ll be happy you had it in your back pocket. It\u2019ll keep your safety net in place as long as possible.<\/p>\n To build your emergency budget, you\u2019re going to be comparing it against your current budget, so it\u2019s important that all of your spending is accounted for and updated.<\/p>\n We\u2019re assuming you know Budgeting 101 and have already set up a basic budget<\/a>. Your emergency budget will be based on that budget.<\/p>\n We\u2019re also assuming you have an emergency fund (because you need one!). Some folks have a high enough net worth and multiple, steady streams of income that they don\u2019t even use an emergency fund<\/a>. In that case, an emergency budget might not be that useful to them, either. It\u2019s mostly for those of us who would truly depend on our emergency fund in a time of financial crisis.<\/p>\n First, review your current budget and all of its categories. Your budget might be on a spreadsheet or in an online tool like Mint<\/a>. Either way, pull it up and check out your main spending categories. Make sure they\u2019re up to date. Look at your irregular spending, too\u2014quarterly insurance payments, estimated taxes, annual fees\u2014these should be accounted for in your budget if they\u2019re not already.<\/p>\n You can create your emergency budget in a spreadsheet, on paper\u2014whatever medium you prefer. When I built my emergency budget, I simply tweaked my categories in Mint.<\/p>\n Now that your categories are in front of you, the first thing you want to look at is non-essential spending.<\/p>\n Wants<\/em>, discretionaries<\/em>, spending cash<\/em>\u2014whatever you call these expenses, the plan is the same: cut the stuff you don\u2019t need. Take a look at anything in your budget that isn\u2019t an absolute necessity, then axe it. For me, these categories included personal care, restaurants, and shopping. That meant no haircuts, happy hours, or new toys when I was in emergency mode.<\/p>\n Okay, yes\u2014budgets need some<\/em> room for fun. Like a diet, if you make them too strict, chances are, you won\u2019t stick to them long-term. But an emergency budget isn\u2019t meant to be long-term. It\u2019s simply meant to keep you afloat in a time of financial crisis. So don\u2019t be afraid to cut stuff out\u2014it\u2019s temporary.<\/p>\n That being said, there are a couple of caveats to cutting every non-essential.<\/p>\n First, consider the cost of ditching your luxuries. For example, let\u2019s say you have cable. You want to get rid of it now that you\u2019re in an emergency, but after your financial situation stabilizes, you plan to get cable again. In this case, you should consider the cost of setting up your box again, taking the old one to a dropoff location, finding the same deal, etc. This isn\u2019t to say you shouldn\u2019t<\/em> cut this luxury\u2014if you\u2019re truly struggling, it\u2019s not a great idea to spend money on cable. But it might just depend on the severity of your emergency. If you have adequate reason to believe you\u2019ll be back on your feet soon, consider the time, cost, and effort of ditching something just to bring it back later.<\/p>\n Also, you know your spending habits and the details of your emergency. Maybe you feel comfortable keeping a few non-essentials. You may have room to add a few of these back in, depending on your situation. But first, you should see just how much you\u2019re working with once your budget is stripped down. Cutting all non-essentials is the first part of that process.<\/p>\n You don\u2019t want to neglect saving long-term. It\u2019s important to contribute regularly to your retirement, and you want to stay on track with your debt goals. But during an emergency, those goals need to be reevaluated. Why? Because if you don\u2019t have money coming in, you\u2019re using your emergency fund to pay for those goals. Do you want to keep paying off debt or saving for retirement? Or do you want to use as little of your emergency fund as possible? Your answer will affect your emergency budget.<\/p>\n Basically, you\u2019ll have to decide whether to:<\/p>\n If you choose Option 1, you\u2019ll simply stick to your goals and add them to your emergency budget. If you choose Option 2, simply adjust your emergency budget accordingly.<\/p>\n When it comes to savings goals, it probably makes sense to put them on hold while you\u2019re in emergency mode. But debt goals are a little trickier, since you\u2019re accumulating interest. To help you decide what to do about your debt goals in an emergency, consider some expert advice on emergency funds vs. debt payoff.<\/p>\n Some say it\u2019s better to forget about an adequate emergency fund and tackle the high-interest debt first. If you agree, you might consider keeping your debt payoff goals intact, even if it means draining your emergency fund a little quicker. For example, here\u2019s what You Need a Budget (YNAB) suggests<\/a>:<\/p>\n When deciding how to best use available cash (including \u201cbuffer\u201d money, new income, and even current spending), look through the lens of \u201crisk of new interest expense.\u201d Existing debt gives a 100% probability of interest expense, so it would be the primary focus of all available money, even at the expense of a smaller emergency fund…I\u2019d maintain the smallest buffer required to allow me to sleep at night, then throw all other cash at that credit card debt.<\/strong><\/p>\n In this case, you can reduce your debt payoff amount if<\/em> your emergency fund gets to that \u201csmallest buffer.\u201d<\/p>\n On the other hand, Money Crashers suggests saving a bit more<\/a> before tackling debt:<\/p>\n While paying off debt first helps your credit score and offers peace of mind, it doesn\u2019t help during a financial crisis. If you put all your cash toward debt repayment, you won\u2019t have anything saved up for a rainy day. Create a six- to eight-month emergency fund, which can help you in the event of a job loss, divorce, or illness. It also prevents you from going deeper into debt while dealing with an emergency.<\/strong><\/p>\n If you like this advice better, you might go ahead and reduce your debt payoff while you\u2019re in \u201cemergency mode.\u201d Consider this advice, then weigh it against the details of your own situation, including:<\/p>\n From there, come up with an \u201cemergency budget\u201d savings goal or debt payoff amount you\u2019re comfortable with. Plan to pause or reduce any transfers or automatic payments while you\u2019re in emergency mode.<\/p>\n After looking at your non-essentials and financial goals, it\u2019s time to review your necessities. These expenses are the same every month. Your cellphone bill, maybe. Your rent. Car registration.<\/p>\n These expenses are fixed, but that doesn\u2019t mean they can\u2019t be lowered. Make a list of your fixed necessities and see if you can find ways to reduce them. When I was in emergency mode, here\u2019s how I did it:<\/p>\n Speaking of insurance rates, you might be tempted to cut back on insurance coverage when you\u2019re in emergency mode. Maybe you\u2019re thinking of ditching your comprehensive coverage, forgoing your renter\u2019s insurance, etc. But keep in mind: when you\u2019re in emergency mode, that\u2019s when you need safety and security most. To me, this is when it makes the least<\/em> sense to cut back on something like insurance coverage. Cut your fixed necessities, but don\u2019t risk going without something that could make your emergency even worse.<\/p>\n After checking out your fixed necessities, it\u2019s time to tackle your variable ones. First, take a look at the necessities that vary in cost each month: your electric bill, groceries, and gas, for example.<\/p>\n Then, find ways to be frugal in each of these categories. I Heart Budgets recommends starting with food<\/a>, which can vary quite a bit:<\/p>\n Reduce your food budget. I know, I know, this is not easy at all. But if you lost your job, you WILL find a way to remove $50 from your food budget, even if you don\u2019t eat quite as healthy while you are dealing with this emergency. No sense in actually going hungry because you \u201cneeded\u201d your organic pine nuts.<\/p>\n For other categories, you might find our bill-by-bill guide to be helpful<\/a>. Here are some additional highlights for being frugal with variable necessities:<\/p>\n Electricity<\/strong>:<\/p>\n Gas<\/strong>:<\/p>\n Groceries<\/strong>:<\/p>\n These are just examples to get you started, of course. They won\u2019t be possible for everyone in every situation.<\/p>\n Obviously, frugality is good whether you\u2019re in emergency mode or not. But this is the time to re-evaluate all the frugal practices you passed on before because they were too inconvenient, or because you had enough money to skip them. When you\u2019re in emergency mode, convenience has to go out the window. Cut back on your variable necessities as much as you can. If frugality is new to you, here are some basics<\/a>.<\/p>\n Even if you\u2019re drafting this budget before<\/em> an actual emergency, it helps to simply know which categories are variable, and what frugal options are realistic should an emergency hit.<\/p>\n After you\u2019ve got your budget as bare bones as possible, look at the numbers. After cutting luxuries, exercising frugality and reducing the cost of necessities, what\u2019s your monthly spending? That\u2019s the number you\u2019ll have to pull from your fund each month you\u2019re in emergency-mode.<\/p>\n You know your own habits and situation. While I prefer to cut all non-essentials during emergency mode, you might feel comfortable keeping a few small luxuries in your budget. In that case, consider how much you\u2019re comfortable adding back in, based on how much you have saved for an emergency, and how long that emergency is likely to last. Or, wait until your situation improves a bit, then add them back in gradually.<\/p>\nStart with Your Current Budget<\/h3>\n
Nix Your Non-essentials<\/h3>\n
Reevaluate Your Financial Goals<\/strong><\/h3>\n
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Reduce Fixed Expenses<\/h3>\n
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Be Frugal With Variable Expenses<\/h3>\n
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Strategically Rebuild from Your Skeleton Budget<\/h3>\n