How to Use, Manage, and Fix an Emergency Fund within a Budget

Emergency Fund Failures and Fixes

 Having a working budget is crucial to living a financially free life. We have talked about this extensively already. By now, you know which categories to use, how to setup automation, and much more! One of the common questions I still get is, “How do you manage the emergency fund?” Essentially, how do you set up and manage this account when there are REAL emergencies?

It can be tricky, but it is typically quite simple. Within the different “buckets” you have for your money to go into, one of these should be your savings. The quickest way to replenish your emergency fund is to temporarily allocate your money you WOULD HAVE been putting toward your savings, and move it to your emergency fund. Once the money is replenished, simply start moving funds back over to the savings. Simple. Done. Right?

Getting You Back on “Track”

Although this is the easiest way to manage it, real-life does not permit this. Once the emergency account is used, other things start to come up which require the use of more money. This starts the cycle of decreasing available cash and increasing the credit card balances through use. Before you can really think about it, you are in a mess of more credit debt than you were just a short while before. So, how do you avoid it? It all goes back to your budget (yes, I am going to beat this to death). Having a budget not only provides a means to view where everything should go, but if you are updating it like you should, where it is going. Think of it as a railroad system, and your money is the trains. The trains can move along the tracks you provide. Hence, you have the ability to send them to whichever location or account you need. Most of these have a set route to make sure all locations are fully stocked and ready to go!

When an emergency happens, your reserve trains are spent to help remedy the problem. The only problem is, it was a one-way trip. If you don’t restock your reserve, how are they going to help in the future? In this scenario, the train with your savings can either make one-stop or two. It can stop and drop a portion of the funds in your emergency account on its way to the savings. The other option is to have it change routes completely to the emergency fund temporarily until it is fully replenished. Once it is done, the tracks are changed, and the savings route can continue!

It’s Temporary

This analogy is quite simple and the message is easy. However, there is no need to get too technical with the explanation. You do not need to revamp your whole budget, as long as you build these capabilities into your budget from the beginning. Although you may have a set savings schedule which will be inhibited from this temporary re-allocation, the key to remember is TEMPORARY. Once you have the money back in the emergency fund, your well-oiled machines will have free reign to continue their original destinations and functions.