The gamut of personal finance blogs have effectively and efficiently analysed the existence of an emergency fund and the benefits of having one. However, there is no one size fits all solution for each and every situation. Rather, the individual should look at his/her situation and create a plan which examines all possibilities. Odd Cents was started in 2011 and although the site was out of commission for a few years, I still receive emails and comments from former readers who found the older content useful.
This post was inspired by a family who created an emergency fund after reading one of my posts. Although I’m still a bit unsure of how much of a help Odd Cents was, this family reinstated my faith in believing that it touched someone. The family graciously consented to being featured and I am elated to share their story with you. Their names have been changed, but the issues and solutions are real. This case study is a great way to see one of the most useful financial tools in action and details how to start an emergency fund. It will help you to visualize the process this family used to stay afloat in a dire financial situation with the help of an emergency fund.
The Browne Family’s Finances in 2011
The Browne (alias) family could be described as a small to medium sized nuclear family. The father, Rohan, worked at a local telecommunications company and the mother, Sabrina, was an administrative assistant at a small legal firm. They have three children – RJ, their eldest and Rowan, their second, attended secondary school on the other side of the island; their youngest, Rina attended a day nursery close to where Sabrina worked. The family lived in a small two bedroom apartment in a suburban parish. They were fortunate to find a reasonably priced piece of land in an eastern parish and had started to build their home. Realising that it would be difficult to get a mortgage on top of their rental payments, they decided to get smaller loans to build the home bit by bit. At the time, they had one car, which Rohan drove. On mornings he drove the boys to the bus stop so that they could take the school bus and he drove Sabrina and Rina to work and nursery respectively.
Rohan and Sabrina’s salaries were average. As a technician at the telecommunications company, Rohan made $45,000 a year ($3,750.00 a month) and Sabrina made $33,600 a year ($2,800.00). Their combined net salary or total take-home income was $5,888.45 per month (after taxes and company pension plans). Here is a breakdown of a typical month’s finances for the family of four:
• Land loan: $1000 per month
• Apartment rental: $ 900 per month – Two bedroom apartment with water included
• Utilities: $400 per month – Natural Gas, Electricity, Telephone and Internet
• Cell Phones: $250 per month for 2 phone family plan for the parents and prepaid plans for the children
• Groceries: $800 a month
• Car Loan: $0 – Loan was paid off
• Gasoline: $500 per month
• Daycare – $300 per month ($75 per week)
• Savings: $ 1,000.00 (combined) per month
• Miscellaneous Expenses: $400.00 – Unforeseen school expenses, lunch money, medical, dental, optical visits, car insurance, clothing etc.
• Hire purchase loans – $330 per month
How to Start an Emergency Fund
The Browne family was not struggling, and was able to comfortably meet their obligations each month. Sabrina, who was an avid reader of the Odd Cents blog at the time, read a post that was written on the benefits of an emergency fund. It was a simple post which listed reasons why everyone should have a go-to account, which could offer some financial relief during their time of need. Sabrina impressed on Rohan the urgency of creating a fund and he agreed. To create an effective emergency fund, they reevaluated their monthly finances to see what were the critical needs that they could not live without. They also decided that they should set a desired period of how long the fund should last. Seeing that so many friends and family around them had lost jobs and had been unemployed from as little as two months to as many as eighteen months, they decided that they should create a fund that would last them for a minimum of one year.
Based on their expenses, they realized that at least one of them must be working in order to pay the bills, but the worst case scenario was that they could both become unemployed. They determined what their critical monthly expenses were, and identified a few steps that they were willing to take to cut back:
• Land loan: $1000 per month – They could possibly negotiate with the bank for a longer term and a lower monthly payback.
• Apartment rental: $ 900 per month – Two bedroom apartment with water included. This was a fixed expense that they could not change, unless they moved.
• Utilities: $400 per month – Natural Gas, Electricity, Telephone and Internet.
• Groceries: $800 a month – This was a conservative estimate, but their food costs fluctuated on a month to month basis.
• Gasoline: $500 per month – If things got really bad, they could sell the car.
• Daycare – $300 per month ($75 per week) – This was a necessity that they could not so without.
• Miscellaneous Expenses: $600.00 – School Expenses, lunch money, medical, dental, optical visits, car insurance, land tax – Rohan and Samantha decided to start making lunch for the children and shop around for cheaper insurance. They also decided that they would investigate the free dental and optical services offered for children and medical services for the entire family.
• Hire purchase and loans: $330
Their monthly expenses totaled a whopping $4,830, which meant they needed approximately $54,000 to survive for one year! They decided that they needed to funnel as much as their savings as possible into a high interest savings account, so that could create their emergency fund. They made a decision to send $800 to that account, and $200.00 to regular savings. Sabrina was hesitant because the amount seemed extremely large and it reduced their savings considerably. But she believed that when they had saved enough money in the fund, they could redirect funds back to their regular savings.
They also agreed that if things were really bad, they could also:
• Reduce their utilities especially the electricity bill
• Take the bus and cut back on gasoline or sell the car
• Reduce their miscellaneous expenses to the bare necessities
• Terminate the monthly cell phone bills and use prepaid mobile phones and prepaid mobile data plans.
Unemployment and Obligations: The Emergency Fund in Action
In the middle of 2014, Rohan was made redundant from his position at the telecommunications company. He had been there for eight years, and he had gained a wealth of knowledge and experience. Rumours about job cuts had been circulating for months, so when he received the news of his departure, he was not surprised. This was a blow to the Browne household, but thankfully, they had made plans in the event that a situation like this might occur.
At the point of the job loss, Rohan and Sabrina had amassed $24,000, which would cover their expenses for just over five months. It was not where they wanted to be, but it was better than having nothing. Rohan received a small separation package from the telecommunications company, which could boost what they had saved in the emergency fund. However, they decided to put $5,000 of his severance towards the emergency fund and the remaining severance in savings. Could they really survive on $29,000 for six months?
It was a test that caused many sleepless nights, but they were able to do it. Initially they had calculated that they would need $4,500 from the fund each month. However, Rohan received a small unemployment benefit from the government, which was about $2,300 per month for six months. This, along with Sabrina’s salary and what they had saved in the emergency fund was enough to keep them going longer than six months.
But, to reduce their expenses, they still decided to cut back on many things. Although he was looking for a job, Rohan was at home every day. They consulted with the day nursery, but eventually made the decision that Rohan would keep Rina at home with him. In the event that he found a job, they would re-enroll her. They also cancelled their monthly cell phone plans and used prepaid plans. To cut back on their utilities, they used basic saving techniques, such as turning off lights in empty rooms and unplugging minor appliances when not in use. They also enrolled the children in the government supplemented health, dental and optical programmes through their schools.
After being unemployed for eight months, Rohan found a job at another telecommunications company. It paid the same as his previous position, but there was the opportunity for him to move up in the company, because they were actively expanding. They were able to re-enroll Rina in the day nursery. However, they continued with their money saving activities. Because their emergency fund proved to be a much needed buffer, Rohan and Sabrina decided to replenish what they had used up and aimed to reach that $54,000 target. There are several lessons that can be learnt from Sabrina and Rohan’s situation.
One important lesson is how to start an emergency fund. There is no right way to create an emergency fund because we all have different situations. You have to determine how much you can contribute to the fund, the expenses that it should be able to cover in the event of a crisis and how many months you estimate that you will need to use it. Additionally, people might have different reasons for creating one. Rohan and Sabrina’s emergency fund was put in place in the event of a job loss. People have been known to create emergency funds for medical emergencies, car problems or even school expenses. What we can agree on is that you should create an emergency fund for any issues that might arise.
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