Sunday, July 30, 2006

Emergencies versus Lack of Planning- Which is Which?

I read alot about Emergency funds for when there are emergencies in life. I wanted to spend a few minutes defining in my head the difference between a financial emergency and general lack of planning and talk about practical preparations for both.

Here are some examples:
Lack of Planning-- new tires for your car.
Emergency-- Transmission repair

Lack of Planning-- covering your insurance deductible if you have a wreck.
Emergency: Covering mulitple Co-Pays resulting from an emergency room visit and doctor follow-ups.

Lack of Planning-- Not having the money to pay your property taxes (if they are not escrowed).
Emergency-- Your property taxes go up $200 (or whatever) a year and you don't have the money set aside.

Lack of Planning: It's vacation time and you don't have all the money. (Obviously right!)
Emergency: Someone gets sick and you have to make a quick trip to see them.

Lack of Planning-- It's time to buy school clothes and you don't have the money.
Emergency-- You need a new suit for a funeral.

Other "Lack of Planning" things that are mistaken for emergencies:
- Most car repairs.
- Insurance premiums.
- Christmas/Birthdays/ all other gift giving occasions.
- Higher than last months utility bills.
- Prescription co-pays you currently have.
- Almost anything else.

Honestly, I think the concept of an "Emergency Fund" is really misguided. Really the definition of an emergency is "a serious situation or occurrence that happens unexpectedly.

In all actuality there is almost nothing in life that we can't expect... don't you expect that you'll have to take an unplanned trip or make a visit to the emergency room. It may not be what you WANT but you can certainly expect that it will happen. Does that make it an emergency?

The bottom line is this-- you need to have money set back. You need to have as much set back as you can and you need to touch it as little as possible.

For those in credit card debt a combined approach is good. Set up your Payment Stack (thats what I call it) and start working it but at the same time put some money back for those things you have failed to plan for. Then, when they come up you'll have them.

If people would stop calling things "Emergencies" they'd feel more in control.

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