This Memorial Day weekend my wife and I decided to go camping. We aren’t huge campers but we thought it’d be fun to take our kids and enjoy the outdoors. My parents were kind enough to let us borrow their camper trailer and their side by side (which is like a super version of a go-cart). My parents live in Utah so on the Thursday before Memorial Day we drove down to Utah and picked it up. On the 2 hour drive home, at about 11:30pm one of the tires on the camper blew. Luckily no one got hurt and I was able to quickly pull over and change the tire. The next day I took the tire to the local shop and got it replaced. Cost me $90.
Then I got home and we had two other problems: our dryer vent is clogged, and our kitchen sink is leaking. I had to call a company to come clean out the vent. Cost me $75. I also had to order a new kitchen sink. Cost me $245. In one weekend I had to fork out $410 for just these things.
This is exactly what emergency funds are for. When the bills came and I had to pull out my debit card, I knew the funds were there. Now don’t get me wrong, I hate spending money on this type of stuff, but at least I didn’t have to put it on a credit card or borrow the money from someone.
The Federal Reserve Board recently published a story that found that 40% of Americans couldn’t cover a $400 emergency. “The finding that four-in-ten adults couldn't cover an unexpected $400 expense without selling something or borrowing money is troubling," said Greg McBride, chief financial analyst at Bankrate.com. "Nothing is more fundamental to achieving financial stability than having savings that can be drawn upon when the unexpected occurs."
The situation didn’t impact me (other than being annoying) in any substantial way financially. It’s not because I have a money tree. It’s simply because I have a financial plan. I spent some time designing a plan that was built to handle these types of events.
Here’s how I manage my personal bank finances:
I keep about 1 month worth of cash in my checking account. I know exactly how much I will be spending over the course of a month and I make sure to have at least that much in my checking account.
I have another month’s worth of expenses in my savings account. I try to never touch this money. If I don’t spend all of the money I planned to in a given month, I transfer from checking to savings.
I have 6 months of expenses in my emergency fund. I have this in a high yield savings account at an online bank. I try to never touch this.
So here’s how the story played out. After spending the $410 on a tire and home repairs, my checking account was too low. So I transferred from my savings account to checking. That put my savings account lower than I like to see it so I refilled my savings account from my emergency fund. Because I pulled from my emergency fund to cover the cost of the repairs, I now know that I need to plan on saving money to beef it back up. Over the next month I’ll be back to where I started and can resume investing my extra cash again.
I had an unexpected financial expense. I had a protocol in place before hand. I was able to handle it with ease and no stress because I knew I had done my due diligence when building the plan.
I encourage all of you to build a financial plan. It helps you have total peace of mind when life happens. We’d be more than happy to help you.
Ps. We had a really fun Memorial Day weekend. We got to spend some time in Yellowstone and the camper tire held up just fine.