You did everything you were supposed to. You saved long and hard to develop an emergency fund that financial experts tell you to keep. Then the unexpected occurred.
You found out that your payroll withholding amount was insufficient and you now have a huge tax bill. Then your trusty ten-year-old vehicle started acting its age and needs new brakes and a transmission.
All of sudden your emergency savings are depleted. What do you do now?
First, congratulate yourself. In the midst of a crisis it can be hard to focus on the positive. It is important to take a moment to credit yourself for having the foresight to manage your problem. Things could be much worse than they are now. You could have a big ball of debt added to your responsibilities. Due to your good planning, you do not.
Next, focus on a new plan to restore your savings cushion. Most financial experts agree you need to keep an emergency fund of 3-6 months of living expenses in a savings account. When you have unexpected expenses, using that money instead of credit cards or short-term loans will be a lot less expensive in the long run.
Now that the unexpected has happened getting back to a position of financial security should be your highest priority. That means rebuilding your emergency fund as quickly as possible following these three steps.
1. Make an emergency budget – and stick to it!
- Cut spending wherever you can.
Remember to make your budget realistic.Try not to make extreme cuts you know you cannot keep.Remind yourself that the cuts are just temporary until you restore your savings to a healthy level.
- Brown bag it for awhile instead of going out to lunch
- Make coffee at home rather than hitting the coffee shop each day
- If you can do without cable for a few months, call and suspend service.
- Temporarily cutting back on media, clothes, and other discretionary spending is also a great idea.
- Temporarily consolidate your savings.
If you’ve been saving for a vacation, a new car or some other big-ticket item, stop putting money into those “buckets” until you rebuild a few months’ living expenses. Once you return to having a decent cushion, you can get back to saving for your other priorities.
2. Build income wherever you can
After you’ve worked on your expenses, is there any way you can increase your income?
Is asking for a raise from your employer a possibility? If so, now is the time to ask. Are there opportunities to work overtime or pick up extra shifts from co-workers? You do not have to do so for the rest of your life, just until things get better.
Do you have anything in your home like old clothes or books that you could sell as a source of quick cash? Could you sell any equipment from long stagnant hobbies that someone else would find useful and buy from you?
Picking up a temporary second job or freelance work can also be a way to earn extra money. It’ll create a stressful few months, but it’ll be worth it to get back to security.
3. Build a backup plan
Worrying about another crisis before you restore your savings may keep you up at night during this time.
Develop an emergency action plan by answering as many of these questions as possible?
• If you lost your job, who could you call to get another position or to find temporary work?
• Whom do you know who could use your skills on a temporary or contract basis?
• Do you have family or friends who could lend you money if you had to ask?
• What would your grocery list look like if you had to spend $50 less each month?
• What stuff is sitting around your house that you would sell if you had to?
• What luxuries could you cut back on in the event of another crisis?
Considering these questions is much easier when you have the time and space to reflect on it. Making these choices with a past due notice in hand and collection agencies calling is much more difficult. Hopefully, you’ll never have to use these ideas, but you’ll feel better for having thought about them beforehand. It’s also something pro-active you can do instead of worrying. Taking action, any action, to remedy your situation can help fight the stress involved and get you in a better head space. That alone is worth the effort.
If you need help, Genisys Credit Union offers GreenPath Financial Wellness. A free member tool to financial education and budget assistance.
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