Unexpected expenses

Unexpected things happen in life.  Some may be good and other things not so good.  We should all take ownership in preparing for unforeseen events that may occur at some point in our life.  We can prepare mentally, physically, spiritually, emotionally, and so on.  Our focus is on the financial aspect when it comes to being ready for unexpected circumstances.

First, we need to realize there is no shortage of expense in our lives.  Each month we need to have enough money for our mortgage, utilities, transportation, food, and so on.  Most of us only have one income or two incomes if your significant other also works.  If one or both of these incomes vanishes, we still need to come up with the money each month to pay bills and buy food.  Ask yourself, how long can you survive if your income disappeared?  Do you have enough fluff in your savings to support a few income-less months?  Also, do you have a backup plan in case you could no longer work for some unknown reason?  These are really difficult questions to answer.

Before answering these questions, I think it is only fair to understand the implications of saving more money versus investing or paying off debt.  If you decide to save an extra $500 or $1,000 per month, this is going to be $500 or $1,000 less you are investing or using to pay off debt (i.e., car loan, mortgage, student loans).  This money sits in your savings account with minimal interest.  This money is also very liquid and those with little discipline may have a difficult time not touching it.  These are a few things we need to think about when using extra funds for savings versus other activities with higher ROIs.

Back to the question, do you have enough fluff in your savings to support a few income-less months?  You need to determine how long it would take you to find another job with a comparable salary if you were let go.  If you think you can get another job in 2 months, then you will need at least 2 months of salary to hold you over.  You should include an additional month as a safety factor, so total 3 months salary saved.  If you did end up getting laid off and had no income temporarily, you will want to understand what expenses you can cut back on for the time being.  For example, you may want to cancel your cable or stop eating out temporarily.

As a young boy, I lived in a small town in Ontario, Canada.  The town had multiple manufacturing plants (i.e., food, automotive, chemical) operating, which provided many residents with good paying jobs.  Unfortunately, by the the 90s a lot of these companies closed their doors and moved to Mexico or consolidated with other plants some place else.  The workers who saved their money were fine and did not fall during these tough times.  The workers who spent their money quickly did have to sell their houses, boats, vacation homes, and so on.  This is something I always think about when planning for the future.  You do not want to end up like the workers who spent their money quickly with no plan for the future.

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