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Financial Advice


Articles and research about personal finance

A little bit in your emergency savings each month will help

Financial Advice


Articles and research about personal finance

Life Without a Financial Safety Net

Updated May 23, 2016

If it sometimes feels like balancing your finances to include savings is like walking a tightrope, you're not alone. Which of these brings you greater comfort: The knowledge that a happy landing is available when a slip and fall occurs, or knowing that disaster is compounded by a lack of preparation?

The No-Safety Net Lifestyle

The option that too many people choose is to simply let the chips fall where they may; the “what-me-worry?” approach to life. This means that when something comes up, they may or may not have the money on hand to deal with it. Major car repairs, medical bills, appliance breakdowns – any number of things can happen suddenly and without warning and they say, “We’ll deal with it when the time comes.” And why is that?

Reasons Why People Don't Have a Financial Safety Net

Are they reasons or are they excuses? Decide for yourself:

  • It's No Fun. Agreed, it would be a lot more fun to take that extra money and throw a memorable party or go on a shopping spree than to set it aside in an emergency savings account that, as of this moment, only exists in the imagination.
  • We're Strapped As It Is. Heck yeah; life is expensive.
  • My Partner Won't Participate. This is one of the major roadblocks to any family budgeting program. If one partner always feels that the other is working at cross purposes to the safety net-building endeavor by continuing to spend money as they did before, it can lead to a serious rift in the relationship. Both parties have to be on the same page or, in worst-case scenarios, they might get into a spending war just to spite each other, and that does nobody any good.

Consequences of Not Having a Financial Safety Net

A person has convinced themselves that it’s just not feasible (or desirable) to have a cash cushion tucked away in an emergency savings account. What now? Well, if that person lives a charmed life, it will never matter. If, on the other hand, they are like 99.9 percent of the rest of the population, they will face a number of situations that demand immediate financial action outside of their normal spending routine – and that’s where it gets difficult.

Without an emergency savings reserve on hand to throw at surprise problems, people must compromise their futures to deal with these situations. Expensive, high-interest loans, additional credit card burdens and borrowing from friends and family become the work-arounds of choice when the chips are down. The irony of this is that the people who couldn’t see their way clear to create an emergency fund before the emergency are now far worse off after it has come about. The long-term costs can be staggering as well, as the reality of falling behind on payments will negatively impact credit scores and make future borrowing even more expensive still.

If experiencing austerity was one of the gripes against putting money aside for dark times, imagine how much austerity there will be after going through a financial emergency without being prepared for it.

Not All Surprises Are Really Surprises

Sure, there are events in life that nobody can foretell (which is why an emergency fund is so important). On the other hand, there are expenses that seem like shockers, but are actually predictable. The age of items such as roofing, fencing, tires and appliances are knowable as should be the approximate time of their demise. Knowing the life expectancy of items such as these can make their demise foreseeable and less of a financial shock when they do need replacing. By including obsolescence into the family budget, replacements and repairs on certain items will not even come under the category of emergency spending.

Budgeting For an Emergency Savings Account

So, where does the money for this financial safety net come from? It starts easily with automatic salary deductions that will become so routine that the money will not be missed. If it is never seen, then it cannot be missed. Certain things can be done without – at least until an acceptable amount of money has been put aside. There’s no reason to live a Spartan manner indefinitely.

How Big Should A Safety Net Be?

  • The Half-Year Safety Net. Ideally, you should have enough cash on hand to get you through a six-month crisis such as a job layoff or a medical situation. This means you set aside enough money in your emergency savings account to cover your utility bills, insurance, rent/mortgage and food for a half a year. Is that a big chunk of change? You bet it is. Would it take a great deal of forethought and a good amount of sacrifice to make this happen? Yes, it would; but imagine how much peace of mind it would buy you.
  • The Quarter-Year Safety Net. If a six-month cash supply seems out of the question, halve that and stay prepared with enough money to tide you over for three months. Preferably, your life will get back on track in those three months and this financial safety net will prove to be enough to get you by. If not, it will at least delay the phase where things start to get financially challenging.
  • The Grand Solution. Still can’t get your head around putting aside that much money for a what-if scenario? Then, at the very least, having one thousand dollars on hand in an emergency savings account for life’s inevitable crises is a great place to start. There are any number of financial blows one can absorb with even this modest emergency cushion. Sure, it wouldn’t be enough to counter a job loss or replacing a vehicle, but it would mitigate the sting of a big car repair bill or a broken air conditioner in the high heat of August without disrupting your everyday budget.

Don't Be Afraid To Use Your Financial Safety Net

It can be painful to have to dip into your emergency savings when a genuine crisis arises; after all, that fund represents a lot of hard work and sacrifice. Remember, that’s what it’s there for. It exists to bridge you over an emergency financial situation. When the crisis has passed, start building it up again in anticipation of the next assault on your fiscal stability that life sends your way, and it will come.

Financial Safety Net Dilemma Infographic

Want to see how the same scenario plays out with and without a financial safety net? This infographic shows how your financial safety net comes into play when emergency situations arise and what the consequences of not having a financial safety net may be.

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