Money Wise Mom

You want your finances to be boring. Seriously. Exciting finances are chaotic. Exciting finances have no balance. Exciting finances give you sleepless nights. Big windfalls and surprise bills are two sides of the same coin. Put systems in place so that you know exactly where the money is going or coming from. Your future self will thank you!

More money in than planned is a great problem to have. If it’s more money from a raise or a new job, your system is to revisit your spending plan (see my Life of Pie series) and update your budget with your new amount. Evert dollar has a job. If it’s a windfall, you should have a goal in mind. Put most or all your windfall towards you primary goal. Congratulations, you have just moved the date forward to achieve your dreams!

On the flip side is a nasty surprise with an unexpected cost and the power to seriously interrupt your life. Your car breaks down. You need to fly somewhere in a hurry for family reasons. Your stove dies. Your furnace won’t start. Your water pipes freeze and burst. Life will throw so many things in your path! These are just a few unexpected examples from my life. Yours will be it’s own interesting list of events, I’m sure.

Enter the Emergency Fund.

“You’ve left me with nothing, but I’ve worked with less.” — Ani Difranco

We all start with nothing when we’re born. No money in, but also no money out. Our parents/guardians look after all our needs until, eventually, we enter the adult world of income and bills. When I left home I was 18. I had a baby on my hip and $10,000 in my pocket (actually it was in a shoe box). I had saved up money working throughout my high school years at a pizza restaurant. I didn’t really know how I was going to make ends meet, but failure was not an option. Whatever I lacked in knowledge, I made up for with sheer determination.

If I could go back in time and teach my younger self, I would have told myself to put one to three months of my total monthly planned spend into an Emergency Fund. Having that money in hand was a golden opportunity to set myself up for success. I didn’t have that savvy at the time, and so, of course, the money got spent, as unplanned money always does! My next few years were chaotic, financially speaking. We lived in overdraft. We lived pay cheque to pay cheque. We had a sword dangling over our heads for years and any major emergency would have ended us at any moment.

Save yourself a lot of sleepless nights. Get your financial house in order and have an emergency fund!

The Magic of a Separate Account

There is power in having a separate bank account for your emergency fund.

Humans are funny creatures. We tell ourselves all sorts of stories, especially when it comes to our money. We also have a hard time feeling connected with the power of our money and making rational decisions. That is why we put systems in place. We want to make our finances boring and protect us from our own irrational feelings when it comes to money.

So here’s the system I recommend. Have your income (ie your pay cheque) direct deposit to your daily spending account. A day or two after you get paid, have an automatic transfer move your planned emergency savings amount to a separate high interest savings account that is ONLY for your emergency savings. Do not pool it with other money. Check out my Life of Pie: Future post for more details on how to allocate your future savings.

Why is this magical? There is no tracking required. You check the account balance on your emergency fund, and you know exactly how much you have to work with. During the good times, you can sleep at night know that you have bought yourself flexibility and financial resiliency. During the bad times, you don’t have to think about anything. You can tap your emergency fund at will.

The Magic of Goals

If you have no emergency fund at all, I recommend that you start out with whatever amount you can manage. The amount will scale based on your life situations. When I started, $20 a pay cheque was all we could muster. And that was fine. We were building our money muscles learning how to plan ahead rather than reactive spending. Our first goal was to save up enough to cover one pay cheque. Once we reached that, it was save up to cover one month of essential spending. And then we upped it to three months. Then six months, and then one year.

Splitting our emergency savings goals into manageable, bite sizes goals gave us the ability to celebrate each milestone. Saving money should be rewarding on its own. But humans are funny creatures. You need to find a way to stay excited about making your financial life boring. Goals are the magic.

How Much is Enough?

So how much do you need, anyway? A few things to think about

• You cannot predict the future, so you will never know how much is the “right” amount. Stop stressing over if you have enough. Save what you can in a balanced way and congratulate yourself for being awesome!
  
• Even the experts cannot agree. You will hear one month, three months, six months, even one year! As I just mentioned, there is no “correct” amount. Three months is pretty good and gives you some run way in case you lose your job. But, more run way is always better. If you have dependants, are the sole bread winner, work based on contracts, or may be laid off by your employer, you will want to pad your emergency more so that you can sustain periods of unemployment.
  
• A credit card is not an emergency fund. Yes, it should be in a separate high interest savings account. A credit card or a line of credit is not an emergency fund. Tapping any credit during the bad times, while it may be necessary, is dangerous. It makes you more vulnerable and pushes you towards a cliff. The last thing you need in a true emergency is the stress of more higher bills and a debt hangover.
  
• Never ever ever ever use a money lender. They are blood sucking vultures that will cost you a lot of money in the long run. Just don’t do it.
  
• You Emergency budget is less than your spending plan budget. When deciding how much you need in a month, go back to the Life of Pie spending plan. In an extended emergency, like loosing your job, you can hit pause on some items. A lot of your “Life” expenses are discretionary. Things like eating out, vacations, and gifts should all be paused until you are back on your feet. You might reduce your dept repayment plan to cover the minimums, just for the short term. Review your spending plan now. How much do you really need in a month if you are living your leanest? That’s the amount you should use to calculate a three or six month emergency fund.

Just Do It

If you are reading this post and you don’t have an emergency fund, I am challenging you to set one up today!

Step 1: Go online and search “free online high interest savings account” and you will find many options to choose from. Apply online; I’ve been able to open high interest savings accounts in less than 5 minutes without leaving my house.

Step 2: Setup your automatic transfer (either monthly or per pay cycle) to move money into your emergency fund every month.

That’s it! You’ve set yourself for a balanced and boring financial future. Well done! Now go play some video games.