3 easy steps to plan your budget for an emergency

November 6, 2014

A well-designed emergency budget can plan for contingencies by carefully considering monthly spending, potential cost of insurance deductibles and saving strategies.

3 easy steps to plan your budget for an emergency

Use these steps to easily create a contingency fund that will get you through any unexpected setback.

1. Examine your spending

Look at what you spend each month and divide your expenses into three categories:

  1. Fixed payments such as your mortgage, auto payment and cell phone plan.
  2. Necessary expenses with variable amounts, such as how much you spend on food, utilities, insurance and gas.
  3. Discretionary expenses that are enjoyable but aren't necessary, including money for restaurant outings, movies and clothes.

2. Decide how much you need for contingencies

A good place to start when figuring out a contingency amount is your insurance.

  • Use your largest deductible as a starting point for what should be in your fund.
  • For example, if the deductible on your home owner's insurance is $5,000, you would likely need to draw from a contingency fund to pay that amount, and so you should strive to have it at the ready.

As for the total amount that should go into your fund, add up your monthly budget.

  • Multiply that by however many months it would take you to find another job.
  • This should be a minimum of three to six months in most cases, but can be as long as a year for higher-paying careers.
  • The total is what you should shoot for in your fund.

If this amount seems impossibly high, you can try lowering it by reducing how much you would spend on items with variable amounts.

  • For example, in an unforeseen situation, you could minimize your commuting expenses by switching from driving alone to carpooling or using public transportation.

3. Save for the fund

Reduce discretionary expenses so the money left over then goes into your contingency savings fund.

  • To make this as painless as possible, create a separate account at your financial institution.
  • Make sure this account is one that is easily accessible with no minimums or withdrawal standards, such as a savings or chequing account.
  • While a certificate of deposit (CD) may be a tempting place to park your money because of the higher interest rates, you may not be able to touch your cash for several months, which makes it useless in an emergency.
  • Ask your employer to automatically deduct a set amount each pay period to go into the new account. Do not withdraw these savings unless absolutely necessary.

Planning ahead

By planning ahead and doing a few calculations, you can be ready for any financial emergency.

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