One piece of advice that nearly every financial expert or advisor agrees on is that you should have an emergency fund. They may quibble over the exact size of the emergency fund, but most recommend somewhere between three and six months’ worth of expenses. There are even emergency fund calculators to help you decide on the right amount.
This is incredibly important advice, but it does not help much once you are already in the midst of an emergency. When the unexpected occurs, you need a plan for moving forward. Whether you already have an emergency fund or not—you need an emergency budget. Here are some tips for how to use your emergency fund or other money sources wisely so that you can maintain financial health during an uncertain period.
Put It in Writing
This is a good rule of thumb all the time, but especially when you are in crisis mode: keep a written budget. While some people can budget “in their heads” and manage money pretty well without writing anything down, you should not use these methods during an emergency. There is too much at stake, so be sure to use a formal budget, whether that means pen and paper, a spreadsheet, or one of the many online budgeting tools available. Doing so will help you see exactly where your money goes and make the necessary changes to your planning and spending from month to month.
Prioritize “Survival” Expenses
When you are trying to make ends meet during an unexpected event, you need to focus on the expenses that matter most and that are required for your survival. These are your basic needs—food, water and shelter. These items should be at the top of your budget and paid before anything else in most circumstances.
There are other important expenses too, so you should put your leftover funds toward them. They will depend on your specific circumstances. For example, if you need a car to get to work and it needs repair then that could be a “survival” expense, because not having the car could cause you to lose your job and suffer a bigger financial consequence. Another example might be childcare. If stopping childcare would mean you couldn’t work, then that might be an expense you need to prioritize above others.
Medical expenses, including prescriptions, are also important expenses. You will want to continue receiving any prescriptions you need to be taking during this period. As for medical operations or doctor’s visits, those bills are important too. However, it may make more sense to arrange a payment plan with your provider instead of giving up a large amount of cash.
Cut Out Luxuries
On a similar note, you should cut out as many luxurious or non-essential expenses as you can. These expenses may be totally separate categories in your budget, such as trips to the movies or other entertainment. However, they could also be luxurious items within your food and shelter categories. For example, you may need to alter your grocery budget to limit the amount of high end items you buy, and focus on cheaper recipes instead. Or, you may need to stop eating out at restaurants.
You should also consider cutting subscription and membership services. This could include cable, Netflix, Amazon, Spotify or any similar service. It could also include subscriptions to print or online publications and gym memberships. Be sure to read the fine print when you cancel these services. You may be able to freeze them for a set number of months instead of cancel.
Downgrade or Downsize Where You Can
Like with cutting out luxuries, consider downgrading items or services where you can. This could be something as simple as not cutting out Netflix altogether, but changing your subscription to the basic plan. Or, maybe you have a car that’s too big or expensive for your needs. Now may be the time to sell it and replace it with a smaller, more affordable car. Similarly, maybe your lease is coming up soon and you could save hundreds of dollars by moving into a smaller place or a different part of town. These are just a few examples of how you might reduce an expense without sacrificing too much.
Look for Deferment Options (But Be Careful)
In times of crisis, service providers are often able to help. Utility providers may waive late fees or suspend shutoffs. Landlords may delay evictions or extend rent periods. Credit card companies may offer favorable payment plans for large balances. Many of these deferment options or concessions have been offered in the midst of the COVID-19 pandemic. In other emergencies that are not as widespread, consumers will need to seek out such arrangements on a case-by-case basis and get them in writing.
These options can provide significant help in keeping your head above water, because they can allow you to meet your most important expenses. However, do not get complacent. You will still owe utilities, rent, and other such expenses in full at a later time. So even if you get short-term relief, be sure to continue budgeting for these expenses and paying as much you can toward them. You may opt to make the payments to your own savings account until bills become due.
Be Mindful of Interest
If you delay debt payments in a pinch in order to focus on the most important expenses, be sure to keep interest in mind. Delaying payments on interest accruing accounts will mean that you pay more in the long-run. This may be necessary to get you through a short-term difficulty, but you need to keep it in mind and plan to prioritize your high-interest debt once your situation stabilizes.
Find Income Where You Can
We have talked mostly about how to budget for expenses and how to reduce those expenses. You should also think about the income side of the equation. Making more money during an emergency can be a financial lifesaver. Consider if you have the capacity to take on additional hours or even a second job. You might also consider making money by selling items you do not need.
Whether you have a large emergency fund or not, you certainly need an emergency budget when things get tough. These tips should help you build a basic plan for how to navigate your finances each month during unexpected circumstances. For more help with a personalized plan, especially if you are facing significant credit card debt, contact an NFCC-certified credit counselor.