Let’s face it, we all have discretionary expenses that we can cut in a time of crisis. We may think of these as necessary for survival, but you’d be surprised how little you can get by with and still survive. The reason so many personal finance-minded people encourage everyone to maintain a fully-funded emergency fund is to help you make it through such crises with as little pain as possible.

But sometimes a crisis can drag on beyond the window your savings have bought you. Well before you reach that point, you should be cutting back on all the easy stuff and starting to eye cuts to things that are progressively more difficult.

Easy

The “easy” things are far from necessities and can easily be cut out of most people’s budgets even in normal times. These are the things on which we spend money to make life more comfortable or interesting, not things that keep us fed and warm. But in times of financial crisis, these things should be thrown out the window as soon as reasonably possible to help that emergency fund last as long as it can.

• Fast Food – Everyone could certainly be healthier without fast food, but in a time of crisis it shouldn’t even be considered an option. You’ll generally pay at least twice, if not ten-times as much on a prepared meal than if you had bought the ingredients and assembled the meal yourself.
• Cable/Satellite – Mass media is fast food for the brain and provides no real nourishment that you can’t find elsewhere for cheaper. When it comes down to watching LOST or keeping food on the table, I’ll gladly say, “Bye bye, Jack!” If you crave input, read the newspaper or a book at your local library or even consider checking out a DVD, but don’t spend your reserves just so you can keep your brain running in idle.
• Internet – There are just as many reasons to keep this “luxury” as there are to dump it, but we’re talking about a financial emergency here. If you require an internet connection to be able to work, consider cutting back your speed or going to dial-up as a short-term fix; if you don’t require the internet, cut it completely until times are better. If you need your regular fix of your favorite blog, One Caveman’s Financial Journey, you can always head down the library or a coffee shop and use their publicly-available resources for an hour or so.
• Cell Phone – There’s nothing (important) a cell phone can do that a traditional land line can’t do. If you’ve run into a tough patch, you’re not going to get out of it by wasting your money on a texting plan. Unless you’re in a contract that would cost you more to leave than to drop, there is no reason to keep the ear-leech live. You can sign up for basic land line service for usually less than half of a traditional cell plan. My land line costs between $12 and $17 a month depending on the number of calls we make, whereas our cell phone plan is $60/month.
• Subscriptions & Memberships – This includes the newspaper, Netflix, your gym membership, and anything else you belong to that takes money out of your pocket. Yes, you can get coupons out of the newspaper that will more than offset its cost, but you can save even more by shopping smart and asking your neighbors for the coupons that they won’t use – an emergency isn’t the time to be overly prideful. Fortunately with Netflix, you can put your subscription on hold for up to 90 days where they won’t charge you, but you also won’t get any new DVDs.
• Lawn Care – Not everyone pays a third-party service to maintain their lawn (I certainly don’t and it shows), but that’s a pure money sink when you have better things to be saving your money for. But this also includes self-care of your lawn. I have a very large lawn and my mower can blow through 5 gallons of gas in less than a month. By cutting back on my mowing schedule (my community requires it at least every 2 weeks and to keep the length below knee level), I can save a decent amount of money and by not watering the lawn I save money on water and I can mow my lawn even less.

Moderate:

If your personal emergency continues on for long enough and your short-term cost-cutting measures haven’t shored up your finances, you have to face the fact that it’s time for some deeper and more painful cuts. The next round of cuts will be increasingly inconvenient, but may be necessary to help you weather through an extended sour patch.

• Car – Like it or not, a car is really not a necessity for most people. With the increasing cost of gasoline, cities and states are looking into larger investments in public transportation. While it may be distasteful, inconvenient, or slower for to you to ride a bus or train, you can save an increasing amount of money by ditching your personal transportation whenever possible. Even carpooling can go a long way toward reducing your expenses. And don’t forget about traditional self-powered transportation such as riding a bike or walking. Not only will you get much-needed exercise, you will be burning exactly zero gallons of expensive gasoline.
• Land Line – Communication is a powerful thing and the relatively cheap communication afforded by a telephone is useful, but even $15/month savings can be enough sometimes to right an imbalanced budget. If you still crave contact, consider meeting with people in person or (heaven forbid) writing a snail-mail letter. Yes, a land line is extremely useful in case of emergency. Being able to dial 911 is important, but emergencies are very rare. For most emergencies, you can be safe enough by running outside and screaming for a neighbor to help and dial 911 on your behalf.
• Retirement Contributions and Other Savings – Notice I didn’t list this in the “easy” category… Most rough patches don’t last for too long, but your retirement is something (hopefully) that will always be in your future. You don’t want to short-change your future self just because you were too selfish to cut all the easy things before cutting your savings. Of course, if you have zero income, it’s really hard to save anything, but if you’re at least making a little money, you should still be socking away whatever you can.
• Appliances – Some appliances are more necessary than others: You can do without a dishwasher or a clothes dryer, but a refrigerator is harder to avoid. Turn off what appliances you can to help save money – this also includes air conditioning, hot water heater, furnace. Depending on the season you could use this stop-gap measure for at least a few months to save a little extra money.

Difficult or Extreme:

Before you reach this stage, you should have already sought and begun using outside help. By the time you get to cutting the difficult stuff, you should be concerned more about your personal well-being than about keeping modern conveniences. If you’ve reached an emergency level where you can’t even afford to pay for your basic necessities you can’t be worried with keeping the lights on or even making house payments, it’s time for a dramatic intervention.

• Mortgage – If things are bad, and I mean really bad – bad to the point where you have cut everything and you still can’t pay for your house – you still have a few options. A bank would always like to avoid foreclosure and the costs associated with it, especially in today’s market, so you can use that to your advantage. If you can afford to make a partial payment, contact your bank and see if you can set up a revised payment plan that will let you keep your house and at least cover part of your interest due. If you can’t afford anything at all, your bank may defer payment for one or two months to give you a chance to catch up. But if your bank won’t work with you, you have very few options: sell the house, rent it out (if your mortgage will allow), or get foreclosed upon. It’s a shame when people lose their houses, but it’s still more important to be able to eat.
• Utilities – You have to be careful with this one. In my area, if your power or water are turned off, they will temporarily condemn your house and forbid you to live there until the services are restored. It’s a pain for those who are severely hurting financially, but it’s a measure the community takes to keep squatters and vagrants out to reduce crime as much as possible. Depending on the season, you may be able to drop natural gas service at least, but expect some pushback from your local government if you start shutting off more of your utility services.
• Meals – Let’s face it: Americans are well-fed. When you consider the measures that people must take in other parts of the world to survive, we definitely have it “easy” with the average three meals-a-day. It won’t save you much, but cutting out just one meal a day could reduce your expenses enough to make the difference between keeping your house and losing it.

Sometimes it doesn’t matter what you do, you just can’t avoid a rough patch. Just like the economy as a whole, your personal economy will have its ups and downs. The idea is to save enough during the ups that you can comfortably weather the downs. But when the downs start looking really down, you cannot be afraid to take increasingly drastic measures to keep you and your family fed and warm. Hopefully it will never come to it, but don’t be reluctant to cut it all for the sake of your loved ones. As long as you can survive the crisis, you can always work to rebuild later.

If things are turning sour, or even look like they might, it’s a good idea to start cutting back right away. That way you’ll be ahead of the game if it does happen or you will have had an opportunity to save even more if it doesn’t. Nobody wants to deal with a crisis, but knowledge is key when it does come up. Like the Boy Scouts say, “Be prepared,” and you will be ready if and when it happens.

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com

When planning your emergency fund, it’s important to store a good percentage of the funds in an easily-accessible, higher-interest savings account.  I have our current emergency fund savings split between a credit union savings account and an ING Direct savings account.  This allows me to gain a high interest rate on the credit union savings, but have easier access to the other half of the money through the ING savings linked to my checking account.

ING recently awarded me with 50 referrals to share with my friends.   These referrals earn you an instant $25 if your initial deposit is at least $250. This is a huge snowflake at an unbelievable effective interest rate of 10%.  On top of that, I’ll earn $10, so it will help with my snowflaking efforts, too.

I’ve set up 10 of my referrals on my new ING $25 Bonus Referrals page. As those are used up, I will replace them with more until all 50 are exhausted.  And, in the spirit of the generosity of I’ve Paid For This Twice Already… I will post referral codes for other people, too.   All you have to do is e-mail me and we’ll get it set up!

Happy savings!

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com

After our Christmas budgets were tightened by the unfortunate timing of my truck’s radiator failure (to the tune of $400), I figured we would probably have a few good months before something new popped up again.

NOPE!

Last night as my wife was trying to prepare dinner for our daughter, she mentioned to me that she thought the microwave wasn’t working right. I decided to test it. I put her dinner back in the microwave (yummy peas and carrots), entered the time, and pressed “start.” The light turned on, the table rotated, the fan spun: everything looked and sounded normal… until I took the food out of the microwave.

It was still cold.

Shoot! Well so much for luck and timing being on our side. So this afternoon, instead of spending $200 on books, supplies, and equipment for my new business, I’ll be spending $200 on a new microwave. JOY!

Thank heavens for our emergency fund. While we probably won’t have to tap the fund to make this purchase, it’s nice to know it’s there as a buffer in case anything bigger goes wrong. Unfortunately, that also means we’re unlikely to add much money to savings this month. I suppose that’s just the way the cookie crumbles.

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com

One of the mainstays in a secure financial life is the emergency fund. But what that fund should be and where it should be stored is a major point of contention through the professional and blogging world. Some require that $1000 be saved for a rainy day and others go as far as to recommend 18 months worth of salary. But what it should be for you boils down to the facts of your life — this is where the “personal” in personal finance comes into play.

I plan to build my emergency fund to about 6 months of income and then reevaluate its balance and how to allocate it once I reach that goal. I’ll likely make sure that 1/3 of it is always in liquid form — probably cash in a higher yield savings account. Another third might be allocated to higher risk investment, but something that will give a higher average return. The final third I might allocate into stocks and mutual funds so that my fund isn’t just sitting around. It’s risky, but if 4 months have gone by and we’re still in trouble, we would have already taken measures to gather additional income and drastically reduce expenses. Those last 2 months of the emergency fund are solely for CYA purposes.

While I may feel I need 6 months saved, you may be comfortable with 3. To make more sense of my target value, I’ll explain the facts in my life that led me to my conclusion.

I am the sole breadwinner. This means that if I am suddenly unable to work or I lose my job, we have precisely $0 in income (barring any supplements from disability insurance). I need to be able to cover all of our expenses if something cuts off that income.

We have a fairly large mortgage compared to our income. It wasn’t the safest bet on our part, but we took a calculated risk when we purchased this house. When we were both working, we were more than comfortable with our mortgage payments, but we also knew that my wife would be leaving the work force eventually. Now that we are at one income, the mortgage takes up a much larger percentage of our monthly income than it did in the past. We don’t want to lose our house or be forced to sell if we fall on tough times.

I’m starting a business. When you’re starting a business, there is always the inherent risk of it failing (heaven forbid). I want to be able to quit my current job at some point, and I’ll need a safety net in place before I’m able to do that. If I was single, that net wouldn’t need to be so big; but now that I have a family to care for, I need to be able to continue to provide for them if I have trouble building the business to a level that can sustain our family.

I have an older vehicle. Older vehicles often need more maintenance — my truck just stole $400 from me last month to cover a new radiator. We’re not in a position to be able to replace the truck, so we need to be prepared if something does happen to one of our vehicles that would otherwise take money out of our other budgets.

Keep in mind, this is my personal strategy and that I do not recommend that anyone base their strategy solely off of another’s template. Your life is unique with your own challenges and risks. I encourage you to read through what others say about emergency funds and make an educated decision on the path you wish to take. For your convenience, I’ll list a few resources I found on the subject that may help you when you decide how to set up your emergency fund.

• FMF, the man behind Free Money Finance, decided that 6 months was most appropriate for him.
• NCN of No Credit Needed started at $1,000 and moved on to $20,000.
• Trent from The Simple Dollar believes that you should keep 2 months of income in savings per person in your household.
• Jim at Blueprint for Financial Prosperity agrees that there are mitigating factors to consider for any emergency fund.

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com