A question we often get in workshops is: ‘What do we do when life happens?’ In other words what must we do when we have unexpected expenses?
The answer: Expect them.
We don’t mean to sound negative but drama happens. You may have reversed into your neighbour’s gate and you now need to come up with the excess for your insurance or you forgot to pay your electricity bill 2 months ago and your kids are freaking out because of the dark. These problems need to be resolved, and now!
Lesson 1 – Dig the well before you need the water
In order to protect you from life’s unexpected little knocks we recommend you need to have an emergency savings goal of at least 50% of your net household income (after tax). So, if you are earning R20, 000 after tax as a household that means you should aim to save R10, 000 as quickly as you can to ensure your family has a financial shock absorber.
By the way, buying the latest PlayStation is not an emergency. Feeling like you really need to get away for the weekend is not an emergency. Make sure you understand that this is a defensive financial strategy to protect you and your family.
This may seem like a small savings goal in comparison to what one would expect to be striving for, but be warned, if you fail to take this action you will find yourself digging into your investments or alternatively worsening your short-term debt situation.
Lesson 2 – Replenish quickly after an emergency spend
I’ll never forget a smart couple who attended one of our couples’ workshops. They learnt first-hand how exposed (at risk) they were because they had no backup plan in place whilst trying to pay off their debts.
They had committed to a debt repayment plan that would take them 26 months to achieve and were about half way when the husband’s car broke down and had to be repaired or he would lose his job. He is a field technician who uses his car for work. The long and short of it is that this couple had to take on another loan which pretty much put them back financially to where they were a year ago and nearly crushed their hopes of ever becoming debt free.
Today, if they have to dip into their ‘rainy day’ fund they will cut out some of their non – essential expenses if they have to, to make sure they can aggressively put this savings mechanism back in place. This means they may take pre-packed lunch as well cancelling their DSTV subscription if necessary. On top of this, they make it a priority to sit down with their kids and explain this happened because they overspent and have to now work as a team to secure the families financial position.
Author: Gary Kayle, Money Coach, The Money School