Lesson #2.2 Don’t Try To Prepare for Everything, But Prepare for Any ‘Thing’ (3:00 mins)
When I say ‘expect problems, and prepare for ‘life to happen’ it doesn’t mean to be prepared for every possible scenario.
For example: Is it possible that a virus can spread causing a pandemic shutting down a country for several months and preventing people from working?
Of course, it could, hello #2020.
But do we need to prepare for exactly that scenario?
We can however be prepared for the likely things that can happen – like being unable to work due to an injury or losing your job for a month due to company layoffs.
So with starting your emergency fund, focus on preparing for the most likely events first, then build a plan for what to do after that.
I call it ‘The Level of Emergency Ladder’
And each level covers different types of events.
Emergency Fund Savings Level 1: $2,500
A $2500 emergency fund is able to cover your car insurance deductible (usually $500) if you get in a fender bender car accident, so you can get your car fixed and you back to work.
It can pay your health insurance deductible (or at least help to pay it) so your insurance can kick in if you get sick.
And it can cover a $1000 ‘small’ emergency expense – like needing a new tire, a short flight back home to be with your sick parent, etc.
It’s a small enough number that it’s not too overwhelming to believe it’s achievable
And big enough to cover level 1 type emergencies
But it’s also not big enough to cover a bigger or longer-lasting emergency.
That’s why once achieved, you’ll want to set your level 2 emergency fund goal in mind
Emergency Fund Savings Level 2: 1 Month Living Expenses
You calculated your survival expense or your Egg and Cereal Budget while implementing Rule #1.
And this is where you start building on each rule.
A level 2 emergency fund gives you confidence that at the very least you can survive a full month without any income coming in or leave a situation that requires some savings to start.
For example: Moving out of a partner’s (now ex-partner’s) apartment and needing a security deposit for your new place.
Even at a small amount, it can start to bring peace that if something happened to your paycheck – an error with payroll or a bank account freeze for example, then you could still survive.
Achieving this level also means you are able to get one month ahead of your bills if there was also some billing error that takes a billing cycle to resolve.
Emergency Fund Savings Level 3: 3 – 6 Months Living Expenses
This level of emergency fund savings can cover a job loss when the economy is doing well and it’s relatively easy to find a job say a month or two.
Or if you have a job that takes 90 days or more to get a new job due to background checks or credentials for example.
3 to 6 months of living expenses can cover you if you need to break a lease and find a new apartment ASAP because of a roommate situation that’s gone sour, or if you totaled your car and now need a down payment for a new one.
With a larger savings fund, your can handle larger events that could happen.
Emergency Fund Savings Level 4: 6 – 12+ Months Living Expenses
The highest level of emergency fund savings and at this level, the emergency fund turns more into an emergency /opportunity fund.
At this level you are trying to prepare, not just for a loss of income or major life-disrupting event – think the 2020 COVID-19 lockdown event.
But also for any – life-changing, offer you can’t refuse – an opportunity that could come along that needs a quick influx of cash.
Don’t worry, as you progress through the levels of money, you can build up to the other emergency fund levels and continue feeling more financially confident.
Ultimately, it’s up to you to decide which events are most likely to happen to you, and which level of emergencies you want to or need to be prepared for given your situation.
BOTTOM LINE: You want to be able to sleep well at night, but also be able to meet your financial goals and obligations.
So what do you do in the meantime when you don’t have the funds to reach each emergency fund level?
I’ll cover that in the next lesson