Column: Financial Planning For The Unexpected

[Written by Carla Seely]

Crisis management: Planning your finances before the unpredictable happens.

Ever been in a situation where you think you are finally doing well, your finances seem to be coming together and you start to have a positive outlook on your financial future? And then – wham! – the unpredictable or the unexpected knocks you back to square one.

If you speak to anyone who’s been in an emergency situation like a fire, flood or having multiple household appliances die within a week [which happened to me], they’ll say the same thing: “I never expected this to happen!” or “I never planned for this!”

The sad truth is, the biggest challenge with emergencies is that not only are you dealing emotionally with the aftermath of the event, you are also dealing with it financially.

A large section of the working population wait for their pay cheque to hit their bank account, only to spend every last dollar and then patiently wait for the next pay cheque to arrive.

The greatest obstacle when you live pay cheque to pay cheque [and some of us don’t have much of a choice] is that you do not have a chance to build any savings – so when an emergency occurs, you do not have the financial resources to cover it.

So the question is: how do you manage your money and plan for unexpected events? It can be answered in two words: EMERGENCY FUND.

The basic purpose of an emergency fund is to cover you financially and fill in the financial gaps, which include unexpected expenses or unexpected loss of income.

For example, you just found out you are going to be made redundant, or perhaps your car breaks down, or you just realize your child’s school costs more than you expected: each of these would be considered an emergency, and having an emergency fund would help solve the issue.

However, an emergency fund should not be used to pay for vacation costs, to buy any type of present, or to pay for a renovation or extension on the homestead.

In addition, an emergency fund should not involve using your credit card or taking out a line of credit, because if you don’t have the money to pay outright to begin with, then obviously you don’t have the money to pay off the debt.

Where do you start? If you do not currently have an emergency fund or find it difficult to save money, the key is to start small, with the understanding that accumulating one month’s worth of expenses will take some time.

We suggest that you begin to build an emergency fund that is large enough to carry you through three to six months’ worth of household expenses. If you have a job that is commission-based, you should look towards saving an amount equivalent to eight months of household expenses.

Instead of setting up a separate bank account to build those emergency funds monthly, look at saving through your pension with additional voluntary contributions. Ask your company to take out an additional 1% or 2% off your pay cheque, and then those funds could be used as part of your “Emergency Fund”. By doing this, it will discourage you from using it unnecessarily, and if you are lucky enough never to need it, then you have increased your savings for retirement – which I would consider a double win!

It is important to remember that life happens; no one is perfect or immune to the unpredictable and unexpected. However, an emergency fund provides you with the time to make the necessary financial adjustments in your life to keep you from financial ruin when a gap develops between your income and unexpected expenses.

- Carla Seely is the Vice President of Pension, Life and Investments at Freisenbruch-Meyer. If you would like any further details, please contact cseely@fmgroup.bm or call 441 297 8686.

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