The beginning of March was a real mess for me and my family. I had to have an emergency mammogram (I’m OK!), my husband tore his pectoral muscle while skiing (man injury = eye roll), our kitchen faucet broke, and we had to get new tires for my car. Some would say it was because Mercury was in retrograde. I would say that it was just really expensive—and none of it was planned.
Unexpected expenses can be annoying, but when you cannot afford the unexpected, that is when things can get dark. People get hit with unexpected expenses every day. It is simply a part of life. However, the key to success is making sure you have the money on hand to pay for these expenses. The scary reality is that most of us don’t have the money. And there is a name for this. It’s called “financial fragility.”
Can you handle an immediate $400 emergency expense (and not have to resort to your credit cards)? Are you able to come up with $2,000 in 30 days? If the answer is no, you are probably financially fragile. Consider this the “sobering facts” segment of this piece:
First, let’s not focus on the past. Don’t beat yourself up over what you haven’t done right. Let’s focus on the present and the future. Do you have enough money to cover the costs of your new tires? Do you have enough money to cover your tax liability this year? If the answer is no, then you are financially fragile. If the answer is yes, how much extra do you have in savings? If you don’t know, you need to look. If you know and you are not proud of that number, then there is work to do.
Part of life is dealing with the unexpected. It will be OK. First, you may not be flush with cash right now, but money is cyclical. There will be money in your future, so don’t despair. Second, breathe through this. There are always creative ways to manage debt and get through hard times. You just need to be smart about managing your liabilities.
If you have to pay a bill that you can’t afford there are options. Medical bills can often be negotiated or you can put yourself on a payment plan with the hospital or doctor. If you have something that is non-medical, you may have to figure out how to access some short-term cash. Is there someone in your life you can borrow from? If not, you may have to resort to credit cards, as much as that pains me to write. If you have to go down the credit card route, then you should create a strategy to figure out how to tackle that debt immediately. If you don’t pay it off as quickly as possible, the interest you owe will compound and grow and you can end up owing much more in the long run.
Has the shock of your newly defined financial fragility motivated you to do something proactive so it doesn’t happen again? If so, let’s get moving. The first step is quite simple. Do you spend more than you make each month? Determine how much you net (after taxes, retirement contributions, health care costs, etc.) and then compare that number to what your monthly fixed costs are (costs that don’t go away no matter how much you cut corners) and your monthly variable costs (your discretionary spending). This will require you to go through your credit card statements and your bank account to add up the numbers. If you are spending more than you are making, there are only two solutions. You need to cut back on spending or make more money. Determine what you are spending money on each month by looking for trends in your behavior. Try to identify two or three ways where you can cut back.
The next step is to start budgeting for savings. Just like you budget for rent and food, you need to carve out a specific amount of money for savings each month. You need to divert that money to an account that does not “talk” to your checking account so that you are not tempted to touch that money or access it easily. Start out with a reasonable savings goal and if you don’t notice the difference each month, then start increasing it slowly. Overtime, you will begin to accumulate savings. Once you get over a specific threshold in savings that would be determined by your monthly overhead, you can start saving for other goals like vacation or home buying or investing.
Everyone wants to know how much they should have in their emergency savings. If you have nothing, then start with something. If you have some, ask yourself how long the money could last if, for some reason, you no longer were working. Your basic goal should be 3 to 6 months of overhead. Your reach goal should be 6 to 9 months of overhead.
Many people ask me if they should save for emergencies or pay their debt. My very glib answer is “both.” You don’t need to save thousands of dollars a month in order to succeed at saving. You can save $25 a month and still build yourself some emergency savings. Do not save at the expense of your debt but instead figure out a way to cut back somewhere else in order to make room for savings. Going through your spending is the most effective way to make changes in your money habits. Once you can identify your weaknesses, you are more fully equipped to change those bad habits and start creating new ones.
Financially fragility is scary and it is something I encourage you to change. Financial security is extremely important and can reduce stress, improve your relationships, and empower you to make healthier and happier decisions in your life. Don’t underestimate the power of financial freedom—get started on that emergency savings account today (not tomorrow!).
Kristin O’Keeffe Merrick is a Financial Advisor with O’Keeffe Financial Partners, LLC
Views expressed are not necessarily those of Raymond James Financial Services and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. O’Keeffe Financial Partners, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services.