Remember the saying “life is what happens when you’re making other plans”? It’s the absolute truth. As I sit here on day number four of my hospital visit, I am thinking more and more about how the medical bill copays will pan out and if I’ll make it back to work in time to not have a lapse in my normal earnings, my anxiety grows, but isn’t as bad as if I didn’t have an emergency fund in place. Many popular personal finance personalities recommend three to six months of expenses in a liquid savings account (not stocks or bonds!) but often fail to talk about how emergencies other than unemployment can come up. Dave Ramsey often mentions car breakdowns can probably be prevented or foreseen and are not always an emergency when you are getting out of debt. So, how can you better test your emergency cash preparedness needs?
Add up your normal expenses including food, transportation, housing, minimum debt payments, and any other necessities such as medical prescriptions. You want to base your amount of what you actually spent in the last several months, so tracking your expenses is important in planning for future expenses. Next, make sure you include and irregular expenses. For me, this includes auto insurance, property taxes, sewer, and HOA dues. You may not incur some expenses if you are out of work for a while. These may include childcare and excess fuel costs you may spend on due to a long commute. Don’t forget to factor in health insurance needs. If you lose your job, you can continue COBRA coverage, but it may be several hundred to over one thousand dollars per month.
Sum these amounts into a monthly amount and multiply by three to six months, depending on your employment patterns and economic conditions in your industry. You need to decide how comfortable you feel with the decided on amount. It’s okay if you feel the lower end is enough. Having some safety net is better than none at all.
Next, consider other emergencies. My recent trip to the hospital for a dog bite had been much more intense than I could have imagined. While I have a relatively low co-pay on my Health Savings Account (HSA) medical plan as recommended by Dave Ramsey, it is still $1,500, and there will be other random bills that may be out of network and not covered. Not to mention possible missed pay if your company paid leave runs out before you are better.
These are just some basic recommendations on what to plan for. What other emergencies do you plan for? Comment, and I’d love to hear your ideas!