When the Emergency is Bigger than the Fund

Reader Question:

What should we do when disaster strikes during Baby Step 2? We are a single income household and my husband just lost his job. We have no emergency fund on hand, other than the $1000 from Baby Step #1.  We do have sizable retirement accounts, but are just trying to decide at what point do we tap them and have to pay that 10% penalty, and how much do we take out at that time? The regular savings accounts disappeared when the kids started college and we have been playing catch-up ever since.

The worst thing you can do when faced with a job loss is to continue to live on the ghost of yesterday’s income. Supplementing your phantom paychecks with credit cards or your retirement savings might make you feel better today, but it will only extend your financial pain.

When your income situation has changed for the worse, whether due to job loss, hours cut or a reduction in bonus – QUIT! Quit your old lifestyle – Today! Do not eat up savings or take on debt to maintain a lifestyle you can no longer afford.

Start by creating a crisis budget. Income is your unemployment + any other.

Just knowing exactly where you are will relieve stress. Having a plan will help you avoid emotionally driven mistakes.

Prioritize the expenses. Feed the family first, then utilities, then pay your rent or mortgage and secure your transportation. Let credit cards and student loans sit if need be.

Start the plan with basic food, no restaurants, no fast food, no steaks, no beer, just beans & rice, Mac & Cheese, PB&J; cut the budget to the bone.

Next, list the utilities, water, electric, gas, NOT cable – NOT internet. If the utilities are behind catch them up before doing anything else.

Shelter is our next priority. List the rent or mortgage.

Finally, secure transportation. List the car payment, get a bus pass, and set gas money aside.

Draw your first line on your budget when you have fulfilled these obligations. Don’t cheat – only include the most very basic Four Walls (food, utilities, shelter, transportation) expenses.

What if your income doesn’t stretch this far?

First go back and check again, are you sure you have each of the categories as low as you can go? If you cannot meet your four walls’ obligations, we may need more drastic action.

Sell your car and get a cheaper one with no payments.

Find a cheaper place to live, or get a roommate.

Get some Income – Quick!

Any income helps.  Everyone in the house over the age of 12 needs to get to work and once they have a job, they need to add a second job. Cobble together several part time jobs, do some babysitting, housecleaning or sell some stuff.

Now, prioritize the rest of your expenses; you need health, life, auto and homeowners insurance. You would like to keep the internet, the cell phones and pay the kids tuition.

Draw your second line when you have, on paper, spent all the income available. Everything below the second line is going to have to wait.

Don’t Panic

Retirement accounts should only be cashed in to avoid bankruptcy or foreclosure and you must be very, very careful even then. Not only will you pay the 10% on the withdrawal, you will be liable for the taxes on that previously untaxed income as well.

Breathe, take care of your relationships, accept help and understand that this is a temporary situation.

2 thoughts on “When the Emergency is Bigger than the Fund”

  1. This is exactly where I was….my monthly expenditures exceeded my monthly income. I took a second job and was able to only meet the minimum payments on everything. Any time we had an unexpected expense (increase in health insurance, emergency doctor visit, broken eyeglasses) it caused stress because there wasn’t any money to pay for it. As fast as my emergency fund was saved, ooops out the door it went to meet the current crisis. And the crisies weren’t only those listed above. I couldn’t accept party invitations – no money for the gift, cringed every time I got a wedding invite – no money for the gift and nothing to wear! Deaths, graduations and celebrations all were stressful because I could not act the way I wanted to, in response to the invitation. I got really good at making up excuses for my absences or lack of participation, when the truth was that I couldn’t afford it.

    My crisis budget was my normal budget. Not good. Don’t let yourself and your family fall prey to this behaviour. Stop spending, cut back, establish guidelines and become a squirrel with your savings so you have the ability to survive adversity and eventually retirement.

    1. When you have no money, everything is an emergency. Thanks for sharing how this affected your social life, we should be sensitive to the fact that others may be in the same place. Maybe they really want to attend the gathering but can’t afford to.

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