Have A Fallback Plan In The Event Of An Emergency

I’m a big believer that you should have money available in the event of an unexpected financial emergency.  Unplanned costs can take many forms.  A medical emergency can present thousands of dollars in costs in one visit to the hospital.  If your furnace or air conditioner goes out and the system needs to be replaced, you’ll be looking at big costs.

Emergencies don’t always present themselves only in the forms of costs.  Cash flow can also present an issue.  If your expenses stay the same, but the amount of money you bring in suddenly gets slashed, you can find yourself in trouble.

OLYMPUS DIGITAL CAMERAI believe that having an emergency fund can help address many of these issues, but there may be times where you need to go above and beyond what you have saved for such emergencies.  It’s prudent to have a plan in place in the event that you need cash even after your emergency fund has been depleted. Thinking about it now can make things a lot less stressful later.

Cutting expenses is a big option.  If your bills go up or your income goes down, look at reducing your cash flow.  Things that you may consider necessities may not be once you really find yourself in a crunch.  Think about reducing or eliminating your cable bill.  Cut your internet speed to the lowest available.  Make sure you are paying the least possible for your cell phone plan.  Cut or eliminate eating out.  All of these things will reduce the amount of money you send out the door each month and can help you pay for that emergency, whatever it is.

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Pay Debt Away But Keep New Debt At Bay

One of the things I love most about being a personal finance blogger is reading stories about other people who have reduced or eliminated their debt.

Our debt is pretty simple:

  • A mortgage – We re-financed our original 30 year mortgage (set to pay off in 2037) with a 15-year mortgage in late 2011.  This will put us on pace to pay that off in 2026.
  • A student loan – My wife has one outstanding student loan.  It is a private loan with a rate lock of just over 2% and a payment under $100 per month.  It’d be nice to pay this off early but we’re not changing our current strategy to do so.  Additional cash flow would have to open up.
  • Credit cards – None.  We use credit cards simply to earn cash back rewards
  • Car – None. We have two cars, both fully paid off.

It’s great as I see a lot of bloggers write about paying down debt, paying off debt, or discussing their personal debt payment strategies.  For the most part, they’re usually pretty good.

However, there is one thing that I usually see left off, and that’s to have a ‘No New Debt’ provision, and a plan to reach it.

If you start off with $100,000 in debt, work hard, and pay off half of it, that’s awesome!  What if you have $10,000 in debt, and you pay it all off.  That’s great, too!

And, with most debt payment stories, that’s often the ‘end’, so to speak.

What it doesn’t address is to make sure that number never goes higher.  In other words, if you pay off half of that $100,000 debt, you should make sure to do everything possible to avoid having that number go higher.

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Is Our Emergency Fund Redundant?

For years, I’ve kept an emergency fund.  This is split between an ING Direct (soon to be Capital One Direct) and Ally Demand Notes account.

Along with the emergency fund, we have money set aside for other savings goals.   These include things like:

  • New Car – Eventually we’ll need to replace one or both of our cars and this would be so that we could avoid or reduce a monthly payment obligation.  This should probably, in reality, say ‘Car Replacement’ since new car implies that we would buy a brand new one, which in all likelihood is not something we would probably do.
  • Home Repairs – Right now we have a good chunk of money in here but will probably be depleted next year when we have to replace the roof on our home
  • Car Repairs – A fund that I keep for things like brake jobs, new tires, and if we would ever have to pay a deductible if there was an accident
  • Cashback Rewards – When we cash in our checks from our cashback reward credit cards, we stash the money here.  So far, both of the flat screen TVs we’ve bought have been funded entirely out of this account.
  • Next Years Tax Refund – When we make withholding adjustments to avoid giving the government a big free loan, I stick most of the money here, and then we divvy it out come tax refund time next year.  This is pretty boring and generally goes to bulk up most of the other accounts here.

There are a few other categories here, but I guess after thinking about it awhile, I’m wondering if our emergency fund is entirely or partially redundant.  It seems to me that if there were an emergency, the funds could be used from other allocations to cover the immediate needs that would be required.

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