Most traditional financial advice talks about the importance of building an emergency fund. Saving three to six months’ worth of your monthly expenses is the rule of thumb. This stash of money will come in handy when you encounter expenses that you don’t expect.
The problem is, only a few people discuss how to use the fund if an emergency comes. But like other financial endeavors, you need to prepare for any financial crisis. Otherwise, you could end up using your emergency fund the wrong way.
Below we will discuss the practical steps to setting up an emergency budget.
What Is An Emergency Budget?
Whether it’s a sudden job loss or a medical condition, a lot of things can change during a financial emergency. Your source of income may not be enough to cover everything. And it can feel overwhelming, especially if you don’t have a plan in place.
Remember that your normal daily, weekly, or even monthly budget may not work anymore when an unexpected financial dilemma hits you. That’s where an emergency budget comes into play.
Basically, it’s a plan for how to manage the income and cash you have while the emergency is going on. But unlike your regular budget, you need to strip all outgoings down to your basic necessities and financial responsibilities.
That means eliminating every type of discretionary spending as much as possible. This way, you can stretch your money further to last longer. Instead of feeling swamped by financial burdens, you can feel more in control of your situation.
How To Set Up An Emergency Budget?
Whether you already have an emergency fund or not, you need to have an emergency budget at some point. It will provide some breathing room for your finances. Plus, it will help you move forward no matter what the crisis is.
It may take some time, effort, and basic math on your part. Note that there’s no one-size-fits-all approach to set up a budget for emergencies. But you can begin with these steps:
Assess Your Financial Situation
It’s vital to get an accurate picture of your financial situation. You won’t be able to come up with an effective plan if you don’t assess your current finances. Start off with the type of emergency you’re dealing with. Is it temporary or long-term? How much of your income is affected? Do you have an emergency fund at your disposal?
By knowing your circumstances, you can better allocate what you have. If you think the emergency will last longer, you might need to make bigger adjustments. Being honest to yourself is an important factor of this step. So, identify all your income sources and calculate how much you’d be earning. Add up to that the bills and debts you need to pay.
Evaluate Your Regular Budget
Before making any changes, you should take a hard look at where your money goes from month to month. Evaluate your regular budget to predict how much you’ll be needing. But if you don’t have one yet, you can visit financial websites such as Crediteck for any budgeting hacks.
Make sure to put everything into writing. Review your bank statements and other financial transactions from the previous month. It will help you track your spending patterns and see where you can make necessary alterations.
Prioritize Your Expenses
Deciding which expenses to cut can be tough. But you need to make sacrifices when you’re dealing with a financial emergency. The first thing you can do is to categorize your expenses into essentials and nonessentials.
Necessities, such as food, transportation, and utilities will likely remain in an emergency budget. Meanwhile, you might need to get rid of unnecessary expenses or those you can’t live without. Note that everyone’s lifestyle is different. Thus, it depends on you to determine your needs from your wants.
But if you can’t make a decision, here are some unnecessary spending you might want to eliminate:
- Streaming services
- Gym memberships
- Dining out
- Entertainment expenses like going to the movies and shopping
Reach Out To Service Providers
While it’s essential to try to make all of your monthly payments, doing so may not always be possible in times of crisis. But the good news is, some service providers may offer deferment options. They may waive late fees or postpone shutoffs. You may also ask your credit provider for favorable payment plans, especially for large balances.
Before you default on any payment, make sure to reach out to your service providers. Note that they may only be able to give you short-term relief. So don’t get complacent. It’s still crucial to pay as much as you can toward them.
Keeping your finances in order is important all the time. But it’s even more so when you’re dealing with emergencies. Remember that there’s no one fixed rule to deal with financial hardships. This emergency budget guide is an excellent place to get started. But it’s also wise to talk to a financial advisor. They can provide you with professional guidance that will suit your specific situation.