Personal finance thoughts, ideas and advice from a self made millionaire. http://www.richeobscure.com Thu, 05 Mar 2009 10:05:00 EST I guess you can say I'm back but that doesn't mean anyone is seeing this site. Of course if you're reading this then I guess someone is seeing it. How did you find us? Anyway. If you take a look at what I have written in the past you'll know that while I can't say I predicted the collapse of the market I did warn people of being unrealistic. Another thing I've pointed out in the past is the foolishness of trying to beat the market and specifically of following Jim Cramer. Well here's Don Harrold who is even more fervent about the danger of Jim Cramer than I am. http://www.richeobscure.com/imback.html http://www.richeobscure.com/imback.html Tue, 20 Feb 2007 12:05:00 EDT Ok so you've been a good financial student and have, or are working on, an emergency fund of 3 to 6 months of fixed expenses. If an emergency arose, even if it were a small event like an emergency car or home repair, or a big emergency like a loss of your job, you'd know you're prepared. Or are you? Having the emergency fund is one thing, using it wisely is quite another. I've written about an emergency I had when, as a union member, I was locked out of work for 11 weeks. That's 11 weeks without income, 11 weeks with bills to pay. The specifics of this event are chronicled in this post but learning from other peoples problems is what the personal finance blog world is all about so here's my lesson. Have an emergency plan. An emergency fund is no use without an emergency plan. First divide emergencies into two or three categories: short term, intermediate term, and long term. Whether you use intermediate term is up to you but I think it's a good idea. Some examples of short term emergencies? The power goes out while you're away and you come home to a refrigerator of spoiled food. A routine car inspection reveals you need new breaks even though you thought they were fine. An intermediate emergency is anything that lowers your emergency fund to an unstable level. What's unstable? Any level that, given your income, will take some time to replenish. A long term emergency is anything that has the potential to wipe out your emergency fund such as a job loss. Most of the time, if possible, you should avoid using the emergency fund for short term emergencies. In other words, if those new breaks I mentioned above can be paid from your usual budget then that's what you should do. The plan becomes more important as the emergency increases in size and severity. If it's an intermediate emergency that takes a bite out of your fund have a plan as to how you're going to pay it back. Maybe you'll divert some money each month that you were investing. Or maybe you'll avoid going out to diner for a couple of weeks. Whatever your choice know it in advance. For long term, possibly devastating emergencies such as an expensive health issue or a loss of a job, the plan, and how quickly you put it into motion, is the most important thing. Contrary to what seems normal I'd suggest not using the emergency fund at all. But what's it for then? It's still for emergencies but with long term problems come long term solutions so instead of relying on a limited resource, stretch that resource so it will last longer than the three to six months you imagined. As outlined in the post I mentioned above, when I was faced with a loss of income I didn't dip into an emergency fund first and keep my usual spending habits the same. Instead I cut back expenses first and used the emergency fund as needed. My planned cuts and yours may well be different but making lifestyle changes first and using the emergency fund last is the smart thing to do. Make your plan by deciding today what you would cut or eliminate if faced with a long term emergency. Would you cut your cable bill from $150 a month to $100? Would you go out to eat less or cut it out completely? Would you change your vacation plans or even decide not to take a vacation? No one can tell you which of these will work best for you but making these decisions and having a plan in place now is the often overlooked companion to an emergency fund. http://www.richeobscure.com/emergencyplan.html http://www.richeobscure.com/emergencyplan.html