Some times are harder than others

Over the past two years, I've successfully trained myself to spend only the money that I currently have in the bank. I've gone from a mindset of "it's only $20, and I'm getting paid next week" to a strict "cash-only" regimen. I use quotes around cash-only because I actually use my credit card, but I pay off each purchase almost immediately from my chequing account.

The positive result of this change is that, over the same two-year period, my revolving debt has decreased by more than 50%, and my net worth is now more than nine times as high as it was in 2007. I have a small emergency fund, and I save up for planned expenses like birthday and holiday gifts, car repairs and clothing purchases. All in all, although I still have a substantial chunk of revolving debt to pay off, I feel as though my financial house is in order.

The negative result of this change is that, when I deplete my savings to cover significant, unavoidable expenses, I feel as if I'm flat-out broke.

Last week, I took our car into the mechanic for an oil change and general check-up. After various small repairs and some sizable new parts, the bill came in at $1,400. Now, my Freedom Account has a "Vehicle Repair" category, which sat at just over $700. This meant that, in order to pay the bill, I needed to move some cash from some other savings accounts. I was able to pull $180 from my Emergency Fund, and $520 from our wedding savings. We've effectively paid cash for the repairs, but our cash savings are now diminished by $1,400. Our cushion is reduced, and with some other smaller expenses over the weekend, I'm left feeling a little naked.

The funny thing is, I almost enjoy this feeling. I know exactly where we stand financially, and that's a huge change from two years ago. Back then, the repairs would have gone on the line of credit, having the same net effect on our net worth, but a vastly different psychological impact. Shelling out $1,400 from your bank account can feel a lot more painful than adding that amount to your debt, and that pain forces you to be more watchful with your spending.

We'll rebuild our wedding and emergency savings. The vehicle category in the Freedom Account will be replenished, and the line of credit will continue to shrink.

We just have to get through this lean patch first.

Enhancing the Emergency Fund

Flexo at Consumerism Commentary wrote earlier this year about a five-point emergency plan, which takes the concept of the Emergency Fund beyond a simple cash balance in an online savings account. Flexo's emergency plan consists of the following:

• "Under the mattress" cash


• Liquid savings


• Investments


• Credit


• Loans/gifts from friends and family


• Frugality (bonus item)

The idea is to diversify your emergency portfolio, so that you have different sources of protection, as well as a defined "order of operations" for getting at your money. The list above is roughly in order of increasing desperation, similar to Mighty Bargain Hunter's rating of piggy bank strength. It's a good idea to have these levels of severity defined before you're actually facing an emergency.

This has got me thinking about my own Emergency Fund, currently a $1,270 balance in an online savings account (actually spread across four separate institutions). If I had to, I could get at this money within 24 hours by transferring it into my primary chequing account, and I have immediate ABM access to a portion of this amount via my HSBC access card. However, I like the idea of a more diversified approach to preparing for emergencies, and this has me thinking of ways I could spread out my funds a little more. I won't be pursuing the investment avenue (beyond my retirement savings) until my revolving debt is paid off, but there are a couple of ideas I'd like to explore in the short term.

The "under the mattress" cash is an idea that appeals to me. In the event of a power outage or natural disaster, it would be good to have a couple hundred dollars in cold, hard cash that I can grab at a moment's notice. Trent at The Simple Dollar has written about doing exactly this, and I think it's a smart move. With this in mind, I plan to pull $200 out of my Emergency Fund this week, and stash it at home. A year ago, I would have been hesitant to do this, not trusting myself actually to keep the money "for emergencies only". However, I feel that I've successfully cordoned off my Emergency Fund from my other finances, and I'll be able to use this cash responsibly.

I've also been thinking about other forms of currency, like stamps and public transit tokens. Now that we can buy "permanent" postage, both of these items are essentially protected against inflation. A stamp will always be good for mailing a letter, and a token will always be good for one ride on the TTC. Having a handful of stamps and tokens set aside (with the emergency cash?) could make things easier in the event we had to get out of town quickly.

Another emergency investment recommended by Flexo is to use your pantry as part of your Emergency Fund. Just keep a stockpile of staples on hand, and you know you won't have to worry about groceries during a temporary emergency. This could also apply to other non-edible staples, such as shampoo, deodorant, etc. Another twist on this is to redeem rewards points for grocery or pharmacy gift certificates, and keep these for use in an emergency. For example, I can redeem 1,400 Air Miles for $200 worth of gift cards at Dominion. That's a handy weapon to have in the emergency planning arsenal.

These ideas, along with building a chequing cushion, are things that I can act on in the short term, with minimal impact on my debt reduction progress.

What other elements do you have in your emergency plan?