Having a solid emergency fund is one of the most important things you could have. General consensus is 3-6 months of full income set aside in savings. Dialing up or dialing down based on what is happening in your life.
Say something horrible happens…I really hope it doesn’t…but what if? Do you know what you’ll do?
In the event of a fire at your house do you have a plan for the family? Do you meet at the mailbox?
If you need to start dipping into your emergency fund what is your plan?
When it comes to Ms. Blue Ribbon and I we have a pretty stable budget and have cut down on all the parts to the level we can live with without feeling deprived. We have tried to account for most things but what if she loses her job, or I do….or we both do?!
That’s why we have looked over and created an ordered list of what to do in the event of someone losing their job. We can do immediate things like turning off overpayments towards the mortgage and turning off retirement payments to 401k, Roth and 529.
Over the long term we can focus on pantry meals, cut the eating out budget, trim down our catch all budget, and worst case cut Netflix 😉
That’s why I have copied the budget into Google Docs and assumed I lost my job. What could we get rid of or do in order to limit the impact and stretch our emergency fund. Then I did that again but assumed I still had my job but Ms. Blue Ribbon lost her job. Finally I did it a third time but where we both lost our jobs. (This exercise can also help plan life insurance)
This exercise really shows you a) how far your fund can get you and b) what really is a must. Much like how tracking your net worth can expose weaknesses and patterns. Answering questions like, “What categories are we overvaluing? or, under estimating their effect on the budget.”
It does another great thing. It makes you feel better. With my paycheck lost we would rely heavily on the emergency fund but I can very easily see for how long. After deleting Ms. Blue Ribbon’s paycheck it shows that we could only run at a small net lose and only have to dip into the fund a little bit!
Now this doesn’t take into consideration other emergencies but you get the idea. You can only plan for what you can know.
Have you ever done an exercise like this? Do you know how far you can stretch your emergency fund?