My goal for the second part in this three-part series is to recommend actions for when you’re about to draw from your emergency fund, have been drawing from your emergency fund, or are nearly out of emergency fund money. The reality is the strategies for all three situations are nearly the same—the main difference is the degree to which you trim back. The earlier you can execute these strategies, the better off you’ll be and the longer your emergency fund will last.
On the Horizon
One of the most common reason folks dip into emergency savings lately is that they’ve lost gainful employment, so that’s how I’ll build this hypothetical scenario. Assuming you’ve recently lost a job, you would be faced with the fact that you’ll have to rely on an emergency fund for an unknown period of time until other employment is secured. If you act swiftly, you can reduce the reliance on the emergency fund considerably, thereby extending the time horizon in which it will be available. Key steps in this scenario are:
- Resist the instinct to panic. Understood—this is easier said than done. But if you start making poorly thought-out, rash decisions, the seriousness of the situation could get magnified quickly. Your judgment can become cloudy quickly, so take some time, pray, breathe, meditate, call friends or family, vent—whatever you need to do to cope. For some this may last a few hours, and for others it may last a few days or possibly longer. But once you can make rational decisions, move on to the next step. And remember, this is a “one step at a time” kind of process.
- Take stock of your financials. Given that you’ve got money in an emergency fund, chances are you’re at least somewhat financially savvy. Hopefully you’re doing a review of your financials every month—actual spending versus a budget, cash flow and future cash flow forecasting, a balance sheet so you know your assets and liabilities, and so on. If not, it’s time to understand your spending and what is mission-critical, semi-critical, and luxury.
- If you’re unsure how to go about this, please find more details in my article “Why It’s Useful to Prioritize Spending” (https://sowadime.com/2020/08/18/why-its-useful-to-prioritize-spending/)
- Eliminate luxury spending. This step is crucial to ensuring your emergency savings lasts as long as possible. For any items you deem unnecessary or a splurge, eliminate spending on those items. As with most of the guidance on this site, this should be specific to your circumstances. An item you deem semi-critical could be a luxury to me, and vice versa. Trim everything you feel comfortable trimming; sleep on it; trim some more. It won’t be enjoyable to forego that spending, but emergency situations necessitate emergency actions.
- Consider scaling back semi-critical spending. If you feel reducing luxury spending isn’t making enough of an impact, scale back the next category—semi-critical spending.
- Evaluate the future need for scaling back mission-critical spending. If you’ve eliminated luxury spending and reduced semi-critical spending and still feel like you’re not getting traction, lay out a plan to scale back mission-critical expenses. The nature of these expenses likely makes them the toughest to reduce. But think through how that might look. Some examples:
- Contact your landlord or mortgage company, explain the situation, and ask if you can defer or suspend payments; maybe they have a program where you can make reduced payments for a given period of time.
- If you have a car payment of any kind, contact the lessor or the bank. Explain the situation and ask if they have a plan to reduce or defer payments.
- Contact utility providers to ask the same question as above. Many utility providers can and will help customers if they’re in dire circumstances. Don’t wait until your bill is past due before informing the companies—they’ll be less likely to help. Call as soon as you’re aware, state your case, and ask for guidance.
- Redesign your grocery shopping list. While food in general is undoubtedly a mission-critical expense, that $16 ribeye or $8 tub of ice cream probably isn’t mission-critical. Develop a plan to buy in bulk (cheaper per unit, in most cases), concentrate on cheaper food items, and avoid the middle aisles of the store where the hollow calories and expensive price tags reside.
- Reduce reliance on transportation. Unless you’re going to a job interview, doctor’s appointment, or other important event, try to avoid spending money to move from Point A to Point B. At the very least combine trips so your commuting expenses aren’t significant.
- Evaluate your insurance coverage. Don’t go overboard here—you still need some base layer of insurance to prevent catastrophic losses. Maybe you can scale back the policy limits, increase the deductible, shed unnecessary coverages, or make other changes to reduce payments.
- If you have other mission-critical expenses that aren’t listed above, spend some time thinking about how you might reduce them.
In the Rearview
Assuming you’ve been drawing down your emergency savings for a period of time, the tactics are similar to the above scenario. If you did not go through the previous exercises, spend some time completing them. If you did and they’re still not enough, consider cutting spending further. Think the crudeness of a hatchet instead of the precision of a scalpel or the power of a sledgehammer instead of the focus of a mallet. Hack away or bust up your spending. This will be difficult—no doubt about it. But at the same time, it’s necessary to prolong your emergency funding.
If you’re nearing the end of your emergency savings, it’s time to start thinking outside the box. Start with your costliest expenses. Is there a way you can arrange for shared housing (get a roommate, break your lease and crash on a friend’s couch, live with a family member for a while, etc.)? If you don’t need a vehicle, consider selling it to pad your emergency savings; just a hint, cars are easily replaced in the future when cash flow is not in jeopardy. Pare back the grocery list to the absolute essentials. This all sounds terrible, but if you’re down to the last few weeks of emergency fund it’s crucial you pursue these ideas and any more you can execute.
As the adage goes, “desperate times call for desperate measures.” It’s up to you to decide how grim your outlook is and act accordingly. If you feel certain you’ll be employed long before your emergency savings runs out, maybe you don’t need to cut so deep. However, if you think you’ll go months without finding work—maybe you’re in a highly specific industry or one that has been decimated by a drop in business—it’s time to eliminate, reduce, and avoid.
The guidance above will help your emergency fund last longer, thereby helping you be a happier camper, relatively speaking. But here’s a hint: an emergency fund should not be your only plan for emergencies. There’s a better, more holistic, approach to planning for these situations. Please continue to Part 3 to learn what that approach is and how to make it work for you.