Personal financial insecurity isn’t always caused by a lack of financial resources it’s more often caused by problems allocating those financial resources.

The reason this happens is because we’re not taught to plan ahead and map out where we’re going. So we tend to react in the face of situations that come up.

This is how this shows up for people:

  • A bill comes in for a major house or car repair and they put it on a credit card because they haven’t taken the time to save up for emergencies.
  • Retail therapy comes in handy in the moment, but now they’re short on the insurance payment that only comes due every six months.
  • A bonus gets spent up immediately on past due bills or debt rather than meeting their goals.
  • They prioritize purchasing large items now like a car or even a house while neglecting long-term goals such as retiring at a decent age.

I say “they,” but it’s really you, me — all of us — we are guilty of this at one point or another in our lives.

A 2016 article in The Atlantic told this story well. In it, the author characterized financial instability as a problem so bad that it’s the “secret shame” of the middle class.

I’ve seen many of these numbers before: most American’s (59% of us!) can’t handle a surprise $1,000 expense. That number shocks and saddens me, and it’s much worse than I would’ve expected. It’s easy to get into a state of financial peril by being reactionary and not having a plan in place.

The Atlantic article author, Neal Gabler, gave a very detailed and courageous account of all the things that happened to him during his career to put him in an unstable financial position. Being a writer, he frequently received book advances, but didn’t budget to pay for the income taxes, so he had to add to his debts. He and his wife sent their kids to private school but never saved for their own retirement.

He talks about making bad choices along the way, as if he had control the whole time. The truth is he was forced to make those “choices” in reaction to his financial situation.  He never had a plan. His story is really about how all these reactions added up to major financial problems.

Then on top of that, unforeseen stuff came up, as it tends to do, which exacerbated his financial problems. He wrote: “But the problem with finances is that life doesn’t cooperate. In our case—and I have a feeling in the case of just about every American—there were unforeseen circumstances.”

Here are my thoughts on this: instead of thinking about everyday life stuff as “unforeseen circumstances,” accept that the only thing unforeseen about unforeseen circumstances is WHEN they will happen. Accepting that, it means you cannot spend every single dollar month-to-month. You must begin setting aside money from each paycheck for contingencies.

You probably won’t be able to pinpoint exactly what unforeseen circumstances will come up, and when. But you CAN plan to have a bit of a cushion to absorb those unforeseen expenses in general.

There are two types of contingencies we need to plan for with our finances:

  • Infrequent: things that come up 1 to 3 times per year or maybe once every few years. The amount is more certain, but without planning it can feel like a surprise expense every time.
  • Incidental / emergency: things that we know can come up but the timing and amount can’t be predicted with certainty

You can plan for both incidental and infrequent expenses, but the method in which you might save are different. A little work upfront will help prevent you from getting sucked into this stressful, reactionary cycle.  Take a deep breath for a moment. We’re going to tackle this today.

The Solution

Plan ahead! You know that certain life events are going to happen to you, you just may not know exactly *when* they will happen. This is why financial goal setting is important. It’s as important as setting life goals and career goals.

I’m not talking setting a goal for how much money you want to make one day (although, that’s a fine goal to set), I’m talking about getting in touch with the things that are most important to you in life and recognizing that some of that is going to require time and money to achieve.

Once you start with putting goals on paper, behaviorally, you’re more likely to make choices that help you achieve those goals. This includes deliberately setting aside money for things that are important to you.  I wish that Neal (The Atlantic article author) and his wife had sought help from a financial advisor earlier. If they had, a good advisor would’ve facilitated a discussion about the value they placed on education for their children, for instance, and provided some options to get there.

If they had saved only $100 a month for 18 years for each child in a 529 plan, though investing and compounding, they would’ve been able to provide close to $50,000 in support to each child for their education. That doesn’t pay for an Ivy League school, but it does help close the gap on state school tuition. Furthermore, saving for retirement is a tax break, and money saved means more cash flow to use on other things, such as saving for kids education.

Thinking about it in these terms, perhaps they could have afforded to set aside even more each month.  Perhaps also, the planning process would’ve helped them view it less like a sacrifice in the present and more as an investment in the future.

Let’s tackle infrequent expenses first.

Planning for Infrequent Expenses

What’s the best way to save up for infrequent expenses? I typically like to split these up into some sort of monthly payment. That way we amortize the cost over months or even years.

Example 1:  Say for instance, that being able to take international trips every year is really important to you, make a monthly budget plan to get there. If you want to spend $5,000 annually, start by saving $417 per month.  Or you can even break this down weekly as a $100/week transfer.

Every twelve months you will have $5,000 in your account to spend on travel.  You can even set this up as a sub account (if available at your bank) or a separate bank account so you can see the savings grow over time. Once you reach the $5k mark, you know you can plan your next trip.

Example 2: Say for instance your car insurance comes due every six months, and during one of those bill payments your car registration also comes due. Normally, the bill is $500, but with the car registration, it’s $900.

Instead figure out what the total amount is per year $500+$900 = $1400.  Then break this up into monthly payments of $117.  Set it up so that there’s an auto transfer from checking to savings monthly. That way there’s enough in your account when the bill comes due.

Example 3: What if you really love Christmas and you enjoy spending $2,000 each year on gifts for family and friends plus you like to travel home to be with family ($500). Don’t wait until Thanksgiving to start tightening your budget belt.

Instead, you can set aside $208 per month into a separate savings account throughout the year to come up with the money for Christmas instead of going into debt.

Example 4: You know your dog needs to go to the vet twice per year and it ends up costing about $300 each time.

Time to think about setting aside $50 per month to cover these infrequent expenses.

Changing Our Mindset

Interestingly when we start looking at these as monthly expenses, sometimes it can influence how we value these expenses. In addition, as you get good at spotting infrequent expenses you can start to tally up the total monthly amortization and transfer one amount to cover all infrequent expenses you encounter from checking to savings monthly.

Want to learn more about creating lasting Financial Resiliency in your life?  Join my course this fall. 

What is an Emergency Fund for?

The other kind of contingency we need to plan for are incidental expenses where both the timing and amount is hard to pin down. Another word for this is emergency expenses.

The best way to save for these expenses is by having an emergency fund on hand to cover them.  When most people think of emergency fund, they might think safety net in case of job loss.

You should be concerned about saving for a potential job loss — this includes whether you quit, get laid off, or need to move on to other opportunities and there’s a gap before you start your next role.  Sometimes people call it a “pink slip” fund.

But job loss isn’t the only thing you should save for.  These are all things for which you might need an emergency fund:

  • Paying deductible on insurance. The more you have saved for emergencies, the higher you can set your deductible (which saves on monthly premiums)
  • Dental or medical procedures
  • Car maintenance and larger repairs
  • Pet emergency
  • If you’re a homeowner, you should make sure you’ve saved a lump sum for maintenance expenses, because sooner or later you’ll need to call the repairperson. This could even be treated as an infrequent expense and saved for monthly if you prefer.
  • Peace of mind: You can breathe a sigh of relief knowing that you won’t have to go into debt or borrow from friends/family in order to cover an emergency

What’s the weirdest emergency I’ve ever encountered before? I accidentally paid my tax bill to the IRS twice. That’s not a mistake you want to make often because you can’t request the money back (until you file your taxes). But my emergency fund was thankfully big enough to absorb the mistake.

How Much Should I Save?

You can try and guesstimate a good emergency fund amount based on the list above.  However, to keep it simple, it’s a good rule of thumb to keep 6-months worth of EXPENSES on hand.

Some people mistakenly save 6 months worth of INCOME. We’re only looking at covering 6 months worth of basic expenses such as food and shelter and any other fixed payments / bills you have.

You don’t necessarily need to include your entertainment and eating out costs in this calculation because chances are, if you really had an emergency (like a job loss) you probably wouldn’t be spending as much in these categories.

This six month rule varies depending on your situation.

  • If you have kids, you may want to plan to cover childcare for 6 months depending on your situation
  • Homeowners should also keep at least 1% of the value of their home (more if it’s an older home), in their emergency fund.
  • Freelancers and the self-employed would be smart to set aside up to a year’s worth of expenses to be on the safe side in case of uneven income or a global pandemic.


What if You Can’t Save That Much?

That’s ok, start small. Make saving a priority through automatic deductions into a savings account. Even saving $50 a month can add up over the course of the year.

Strive to first save up one month’s worth of expenses, then two, and so forth. Set aside some or all of your next bonus or tax refund to cover emergencies. It will start to add up, fast.

Aside from your fixed-cost bills, emergency savings should be one of your highest personal finance priorities.

Should I Save for Infrequent Expenses or Emergencies First?

Saving for infrequent expenses will help prevent a debt cycle – so that’s where I’d focus my efforts first.

Once you are humming along with monthly savings for those things, then you can start funneling money to build an emergency cushion.

You can also consider “bonus money” — whether a bonus, gift or tax refund, as an acceptable way to pay for some or all of your infrequent expenses. Perhaps you consider a 50/50 split of using some for infrequent expenses and some for building an emergency cushion.

Where Should I Put My Emergency Funds?

Park them in a safe, easily accessible account earning the highest interest rate you can find.  I usually see the best deals with online-only “high yield” savings accounts or credit unions.

Check around and compare rates. Make sure you’re getting a long-term rate and not a bonus rate that will decline in 6 months. The bottom line here is, if you’re only getting .08% on your savings right now, find a new company to work with.

I want to stress, the “easily accessible” and “will not decline in value” concepts.

How Did I (we, as Americans) Get Here?

If I had to put my finger on it, it’d say it’s a lack of focus and lack of education/awareness around personal finance.

Perhaps also, the common need for instant gratification prevents us from thinking ahead to the “what-if” moments, which then fuels a lot of overspending and debt spending. Aside from awareness and thinking ahead, there’s a trick Americans aren’t really using.

When bonuses, salary increases, big gifts, tax returns, or other windfalls come, we tend to spend most of it instead of saving. To combat this, ask yourself “What am I going to do with this money?” well in advance.  The first answer shouldn’t be — “spend it.”

You should be looking at your future self needs too. What am I going to need in the future?

How Do I Motivate Myself to Save More?

Try visualizing what your emergency fund means to you, or earmarking for specific purposes. Maybe some of these speak to you:

  • Prepayment of expenses that you’ll probably incur at some point.
  • A rainy day fund.
  • A financial freedom fund that would allow you to leave a bad situation at work.
  • A fund that will save you a ton in credit card interest because you won’t have to go into debt the next time an emergency comes up.
  • A worry-free fund that allows you to breathe easy when you get a big bill in the mail.

What To Watch Out For:

Unplanned, recurring expenses (even if they happen infrequently) can create major cash flow problems for the average family. Don’t borrow from your emergency fund, except for emergencies.

On the flip side, once people establish a good emergency fund they can fear using it. If an emergency comes, up that’s what it’s for.

There is such a thing as having TOO much emergency fund. Everyone is different, but there is an upper limit to how much cash you should have on hand.

Make sure these dollars are working for you by searching for the best interest rate. Shop around every 2-3 years.

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