Knowing The Difference Between Emergency & Urgency!

Living In Financial Freedom

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Financial freedom is on everybody’s list of must-haves, or should be, because financial freedom allows us the attitude and resources to live abundantly in each stage of life, free of worry, anxiety or money concerns, to completely live out the full vision and goals of one’s life. Although financial freedom is defined differently among people, each definition  contains in it some basic common elements: Let’s take a look at those elements and how they fit into our lives. Common financial freedom elements:

  1. VISION for how you want to invest your time, talents and money
    • Answer the questions: Why am I here? What am I passionate about? What does my life plan look like? How can you pursue your dreams when you don’t know what they are?
  2. PLAN (budget) that supports your vision and quality of life you want to maintain
    • A budget is simply a plan for spending your money that is consistent with the vision you have for your life. It’s making a plan for using your money instead of wondering later on where it all went. Good budget meets a couple criteria:
      • You live within your means: Only spend money you have
      • It includes savings for your goals
  3. DEBT-FREE approach to everything we purchase
    • A debt-free approach doesn’t mean we NEVER use debt, but that we use money we have whenever we can and when we use debt, we prioritize the elimination of debt in our budget. A wise man once said: “The debtor is slave to the lender.” There’s no slavery in freedom.
  4. A bias toward SAVING
    • Savings must be a priority in our budget. How much do we need to be saving? Let’s start the conversation at around 15% of our take home pay. Why? Because we need to have three types of savings for future needs: We need an Emergency Fund for when life throws us a curveball. We need savings for Retirement and we need to be saving toward known future expenses, like cars, furniture, kids, etc. Adequate savings allows us freedom to act when we want to.
  5. An ATTITUDE of contentment with where you are, and gratitude for what you have
    • Don’t compare yourself to anyone else, but be content with where you are. Contentment brings peace and peace is a large component of freedom. Gratitude focuses our mind on what we have instead of focusing on what we do not have. Be grateful, always.

This blog post focuses on the savings component of financial freedom, specifically the Emergency Fund Savings, and how to build it and use it correctly.

Emergency Fund Savings – The Best Self-Insurance

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Emergency fund basics:

What is it? Savings set aside for immediate use in the case of an emergency. Essentially, it is the lowest cost self-insurance.

Where does it reside? In a safe, accessible location, like a checking, savings, money market account or any place that is quickly accessible.

Why do we need it? To self-insure against inevitable emergencies or disaster and prevent the build up of debt, worry or frustration.

How much is enough? Most experts suggest 3 to 6 months of expenses, and almost all suggest at least $1,000 to cover insurance deductibles or instant emergency needs.

What priority is the emergency fund? It is top priority, before retirement savings, college education savings for the kids or savings for a home or new auto. The first $1,000 is even more important than debt elimination!

For most people dedicated to financial freedom, building the emergency fund takes a little time but otherwise is easy and straightforward. So what’s the hard part?

Emergency Fund – The Hard Part

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The hard part for many people is not saving the emergency fund money, but determining when is the appropriate to use it. It is tempting anytime we save money to use it for something “special”or when you get “an offer too great to pass up”. But an emergency fund is different from any other type of savings we have. Emergency funds must be saved for true emergencies because it is this money that keeps up out of debt when a crisis occurs. Thus, we need to be very judicious in using the emergency fund.

Urgency vs. Emergency – Know The Difference

For many people, it is hard to determine the difference between urgency and emergency. They look at their emergency fund as ready cash “if something really good pops up.” This is the wrong way to approach the emergency fund, because there will always be a sale, or a special deal, or “any opportunity” to purchase, which can put you at risk when that real emergency unexpectedly shows up. Most sales or special deals use time pressure to get you to buy, so we have a sense of urgency to make the purchase or risk missing out on the deal. By definition, these situations are urgent…but not an emergency. The best way to ensure there is money available for emergencies is to develop and follow a set of emergency fund access rules. Literally, criteria that must be met to access the emergency fund money.

For me and my family, the emergency fund can only be used in four situations: Health, Home, Auto and Family emergencies. Let’s look at some situations in each of these categories that are true emergencies where we can use emergency fund money, or just urgent situations where we can not use emergency fund money:

Type Situation/ Opportunity Emergency or Urgency? Can Use Emergency Funds?
Home Leaky waterheater Emergency Yes
Tables – 75% off sale Urgency No
Broken window Emergency Yes
Health Broken leg expenses Emergency Yes
New yoga class on sale! Urgency No
New workout shoes Urgency No
Auto New cool rims Urgency No
Blown out tire Emergency Yes
New water pump Emergency Yes
Family Job loss Emergency Yes
Vacation Urgency No
Attend family funeral Emergency Yes

Having clear criteria for emergency fund use helps us discern in a time pinch whether or not fund usage is appropriate. Otherwise we risk using the emergency fund money on urgent matters like a sale or special offer and then we are left unprepared for when true emergencies arise.

Why All The Fuss?

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The fact is, each of us will experience significant emergencies in our lives. It is reported that each adult has a 78% chance of a real emergency in any 10 year period of time. So over the course of your adult lifetime, about 60 years or so, chances are you will have 4 or 5 real emergencies when you need to have the emergency fund ready and funded to help you through the situation. It’s not a matter of “if” you will have an emergency, but “when”, so we must be prepared.

What’s the best plan? Build and maintain an emergency fund, with somewhere between three and six month’s of expenses in it. Develop criteria for using the emergency funds and a process to access the account to ensure the fund is used for emergencies and not urgent, emotional purchases. Because, missing a great sale may feel like a missed opportunity, but not having money when an emergency occurs could put us in a financial bind and potentially lead us into debilitating debt. Financial freedom requires that we save and properly use an adequate emergency fund to self-insure against inevitable emergencies. Financial freedom is not easy, but it is worth it!

Want more help with your personal finances? Consider Dave Ramsey’s Total Money Makeover. Click on the link and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

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