How to Avoid Financial Emergencies

I have talked to many people about the importance of having a Periodic Savings account. This is an account you have set up to put money into each month in preparation for expenses that come up throughout the year that are not part of your normal budget. Some examples of periodic expenses are property taxes, insurance premiums, vacations, and such things as car repairs, home improvement projects, and medical problems that may arise. You see, these are things that you can predict you will need to pay, so you can set aside funds and be ready when the time comes so that you are not scrambling to pull the money together. It can be a part of your regular monthly budget. When you have saved enough extra, you could even put some of the funds into investments to make more money. But we will not get ahead of ourselves here. I want to talk about why it is so important to have these funds saved.

The example I use most often to illustrate my point is having your car break down. Now it is in the shop and you find yourself with a bill for $1200 for repairs. For most people, this feels like an emergency. They panic and wonder where the money will come from and how they can get it fast enough to pay the bill. Or they put it on a credit card and end up trying to pay that amount plus all the added interest for a long time. The thing is, a car breakdown is NOT an emergency. Cars are not made to run forever. They break down. It’s a certainty that if you buy something like a car, it will eventually need care and repair. The same is true of air conditioning. It may have worked all last summer, and then next summer comes, and it is HOT outside and the air doesn’t come on. So you have the repair guy out to the house, and he hands you a huge bill for repairs. Again, this is NOT an emergency. You know that there is a chance that in owning a home you will have to have repairs done. It could be the clogged pipes next time or the broken washing machine.

I recently spoke with a couple who wished they had a periodic savings account set up. There was a terrible storm in their neighborhood, and the neighbor’s tree was knocked over by the wind onto the power lines in the backyard. It took over 33 hours to get the power back on, and they were not able to save all the food in the freezer and refrigerator as they tried to get the baby, the dog, and the expensive food (they saved all the meat) to the in-laws’ house. When the power came back on, it was too late. The rest of the food had thawed out and had to be thrown away. So they had to take a shopping trip to replace all those groceries. This of course was not as big a bill as a new transmission, but it would have helped if they had the money saved up so it would not impact their budget so much today. Now instead of going on a dinner date at the end of the week, they will be staying in to save money. Unfortunately the story doesn’t end there. A few days after they bought all new groceries, the laptop’s motherboard went out. The computer was just a few months out of the warranty and could not be repaired for a reasonable price, so the couple was faced with the dilemma of having to pay for a new computer or trying to do without. Again, they would have been very happy to have a periodic savings account so they would not have to scramble to figure out where to get the money.

So begin now by taking a look at the expenses like this that may come up in your life. You don’t have to be prepared for each and every separate instance that may happen, but build up a fund besides the known expenses like taxes and insurance, so that you are prepared when the time comes that you need that money. Then you can rest assured you will be OK, and you will save yourself a lot of stress, and your budget will remain intact.

Tags: financial emergencies, periodic savings account, savings