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Turning A Financial Emergency Into a Minor Inconvenience?

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In my previous article, we covered tips for saving for an emergency fund. In this article, let’s take a deeper dive into other matters related to savings for a financial emergency. 

Food for thought, would you consider your credit card your emergency fund?   

I guess there is no right or wrong to this statement but it does help that at least we have an emergency fund that’s equal to the credit limit of credit cards. If we have to rely on it to get past an unexpected expense as a last resort, we know very well that we’re able to pay it off without carrying the balance to the future. 

So, it’s not wrong if you consider your credit card your emergency fund. However, there’s one problem.

In a scenario where you don’t have to rely on credit or loans to save you in a financial emergency, you don’t really have any pressure or commitment to repay it after the emergency has passed.  

When you rely on credit to get you out of financial emergencies or unexpected events, once this issue is resolved, you’ll then need to deal with the next time bomb. Depending on how well you’ve prepared and managed your money before this, it could lead to another emergency in the near future. Assuming your money management skills haven’t improved in that time, you might be looking at an even more dire situation!

Firstly, in this second ‘crisis’, you may have less or no capacity to increase your loans or credit limit to help you (since there’s a good chance those limits have been utilised and not cleared from the first time). On top of that, let’s assume for a second that you can still count on credit cards for this second bout; how do you think your monthly cash flow situation will be like after this? 

Certainly a much bigger portion of your future income is now tied to repaying those debts. This will reduce your discretionary cash flow (or disposable income), meaning your ability to save for a ‘real emergency fund’ is now much weaker compared to before. Moreover, with lesser discretionary cash flow, it also implies that you are likely to be unable to prepare or save for other future dreams. In a worst-case scenario, you might be playing musical chairs with your debt, using the income you take home each month.  If such a pattern is maintained, it may affect your overall satisfaction with life, and even lead to a compromise in your mental health

So, there seems to be a cost to treating your credit cards’ limit like an emergency fund, and this is more costly than monetary cost (interest rate). It comes with a much bigger price tag like your freedom and ability to plan for the life that you really want to live. 

If you’re thinking about keeping a certain card’s limit as your emergency fund, why not consider the alternative that’s much less complicated, and most likely comes with less pain in future?  

I get it – this alternative comes with a pain today, as it requires us to not spend that amount of money, save it up, stash it somewhere, and forget that we have that money. With our brain wired to seek pleasure, and that instant gratification is a sure way to reward us with such pleasure, this could be a tough call for some people. 

Is there a way to avoid having to sacrifice your lifestyle today while still able to prepare for emergencies? I’d say YES. There are certain emergencies that we can actually ‘neutralise’ and make it a non-emergency. Based on common ‘emergencies’ people have told me about, here are some and how you can prepare for it: 

Your real expenses 

Have you got this experience where you were shocked, or even found yourself wondering how a certain bill that should be due a long time from now ‘suddenly’ becomes payable? For example, your car insurance and annual road tax renewal, your car’s battery that gives up on you every one or two years, your yearly subscription to certain services, yearly insurance premiums etc.  

The truth is, these bills don’t suddenly become due today; it’s just that time really flies and while looking at the new renewal or invoice, your mind tells you you’ve just paid for it not long ago. Just like this, you have landed yourself in a financial emergency. You may not have sufficient money at that moment to pay for those annual or quarterly bills which can be very important expenses. That’s how you will notice your savings getting depleted every now and then. 

Can you stop these things from becoming emergencies? Yes, you certainly can, and it’s very easy and simple. You just need to add all of these bills up, divide by 12, and set aside this amount every month in another savings account. Settle those bills with the money in this account when they’re sent to ‘surprise’ you and take comfort in knowing that these will stop becoming a surprise to you! 

Celebrations, occasions, vacations 

As social animals, we have people we love, care about and celebrate festivals with, or even birthdays, and other milestones. It costs money to celebrate and in a typical month where you have too many to celebrate, you may find it difficult to strike a balance.  

You can also prepare for these ‘emergencies’ in advance. List out important occasions and celebrations. Include your expected spending during festivals like the New Year, Hari Raya, Deepavali, Christmas etc. Divide by 12, and save this amount monthly in a separate savings account.  

You can now celebrate with peace of mind and sense of freedom knowing that you are spending money you have prepared for, and best still, your own money (from the past, not the future)! This method is also workable for bigger ticket items such as your dream vacation.

Medical emergencies 

Accept the fact that no matter how healthy your lifestyle is, you’ll get sick eventually. Apart from sickness, it may also pay to make regular visits to the dentist or doctor, including to conduct health tests. Like everything else, these cost money. 

Like the previous examples, you can apply the same method to prepare for this. The only problem is that you’re not able to accurately predict how frequently you’ll be unwell and how much that will cost. This is when you have the ‘fun’ to make an estimate. Personally, I put away RM50 a month for clinical visits. When I don’t get sick so often (which is a good thing), I get to carry forward the balance to the following year. 

For bigger medical emergencies, like hospitalisation or a long treatment process, you can either save using your own money, or ‘outsource’ this to medical or personal accident insurance.  

By preparing accordingly, the occurrence of financial emergencies can be reduced greatly. Moreover, by taking into account and being realistic about the spending that will eventually take place today, you’re taming your instant gratification monster by having less to fuel and feed it. 

If you have put aside the set amount, can you pay for these things using a credit card? You can! Because you already have cash in your accounts available to pay for your credit card spending. So, if you want to, why not?

About the author 

Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at kevin@nextgenadvisors.my and www.kevinneoh.my

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