$5,000 Saved isn’t Enough. An Acid Emergency Plan is Better.

The majority of Americans don’t have an emergency plan. Even though massive financial emergencies happen on average every four years, most are under-prepared. Additionally, a crisis tends to compound existing issues.

Prior to the Pandemic, the media plastered giant warning signs that the average American doesn’t have $2,000 to cover an emergency. But that’s just the thing, it’s not just the $2,000.

At the risk of sounding like a jerk, the local small business owner didn’t just lose his/her home during 2009, out of the blue. It’s likely that years prior, they were over-leveraged on their expenses which finally took them under. Was it the large 4 bedroom home with entertainment system in the basement? Maybe, it was the 2.5 cars parked in the front. Or was it, the myriad of credit card expenses used to showcase to others success?

That’s how problems work; they stack like Jenga sticks. I assure you that his/her issues went way beyond $2,000. People are living paycheck to debt, and one false move can take you under.

When the Plan Goes off the Rails, Your Savings Won’t Be Enough

When asked about my household’s bank savings, I respond that we don’t have a more than $2,500. In shock, some dismiss it while others are intrigue. Instead, we have a Financial Emergency Plan.

For example, recently our car starter went bad. The cost came up to $400 for parts and labor. While conventional wisdom would require that you use your coveted emergency savings, my wife and I opted to use the credit card. Why?

It’s the points and a quick pay off using cash flow management. But that’s something simple. What would we if we had a $30,000 issue? Instead of dealing with future problems in a panic, we created an (Acid) Financial Emergency plan.

This helps keep our family clear-headed and accountable to our long term vision.

Creating a Financial Emergency Plan with Multiple Phases

The old adage was to keep as much as six months’ worth of expenses in a bank savings. That idea was generated in the 50s when a gallon of gas costs 18 cents.

The average household lives differently and spends as much as $60,000 a year while investing less than $8,000.

Even bank CD rates were as high as 11% in the 80s. Now they are hovering dangerously close to 0%, 0.36% to be exact. See the Bankrate.com article.

So instead of throwing away $18,000 at 0.01% in a bank savings account and getting the purchasing power of less than $14,000 in 5 years due to inflation, I recommend you rethink money.

What’s an Acid Financial Emergency Plan

Acid is a corrosive, we often see it burning through layers and that’s how this plan works.

In contrast to relying on one lifeline (the bank savings account), we inventory all the financial cards in our hands to figure out which one to play first. It’s important to remember that not everyone’s hand will be the same. Additionally, your financial hand can change overtime.

This is why personal finance is personal.

Some issues are mild like the car starter; other issues, however can get complicated and expensive. The Acid Emergency Plan is well suited for emergencies that are sub $50,000. It also offers a SMARTER financial strategy inline with wealth building versus panic living.

The Plan makes use of:

1. Utilizing Credit cards for points and buffering,
2. Managing current expense cash flow management,
3. Tapping into Bank Savings Account
4. Increasing passive income,
5. Reducing investment rate,
6. Medical claims through an Health Savings Account, and
7. Taking profits from investments.

An Emergency Plan Handled with Credit Cards?!

Yeah for most emergencies, you likely won’t have the time to go to the bank or the ATM.

It’s best to keep most of your credit card balance untapped. This will keep your credit score high as a benefit. Using credit cards can yield you discounts and/or credit card rewards.

These rewards can give you up to around 3% cash back on average.

Cutting down a $15k emergency by $450 with cash back rewards is better than nothing. Additionally, credit cards provide you with a buffering time. Think of it like a time out in a game where you are losing.

Yes if you keep a rolling balance, it can be taxing. However, it comes down to how long you keep the balance. While it might be uncomfortable at first, buying mental space on credit brings you to the next phases of the plan.

Break in case of Financial Emergencies

Managing your cash flow is extremely important. It often works best way before an emergency. By that I mean, you need to reduce your expenses and live within your means. Your goals should be to learn to normalize your happiness outside of spending.

When an emergency hits, this strategy will act like a shock absorber. Cash flow management at that point, is merely cutting back unnecessary expenses to pay off the credit cards. This would include not eating out as much or postpone Amazon $AMZN buys. After you have done all you can, now is the time to grab some money from the bank savings.

I say some because when it rains it pours. You never want to drain your savings; anything can happen next. Only break as a last resort.

Increasing and Reducing Where Available

The final phase relies on seeing possibilities in your emergency plan.

You can increase your passive income by taking additional shifts, overtime or even a weekend job. Or better yet, you can decrease your investments rate.

Since my wife and I max out our 401k, ROTH IRAs and HSA; we can decide to cut back our investment for the interim. The main cut would likely come from investing monthly in our ROTH IRAs ($1,000 per month) and then cutting back to the matching rate in our 401ks if we needed to.

Thirdly, we could take some medical claim reimbursements from our HSAs. This is tracked by our provider and since we already pay for them out of pocket in the past; this is a win-win for us. Finally, if all else fails, we can focus on getting selling some high performing stocks.

While the last one might not be opportune depending on market performance, it’s still an option. Grabbing from growth stocks isn’t a bad deal even if you have to pay for some taxes the following year.

You can’t always win them all. Sometimes you lose some battles to win the war.

It comes down to Crisis Mitigation. That’s the beauty of having an Emergency plan.

This is truly a higher stakes game. When an emergency hits, we don’t have the luxury of time. Even worse, we might not be emotional prepared. This could be a medical emergency, a sudden job loss, or even a starter on a car.

A crisis is always inconvenient. However, I found that life can be tackle proactively versus re-actively. This is why an Acid emergency plan will always best emergency savings. Having $2,000 or even $10,000 might not be enough at any given moment. In that case, why not plan ahead for the best possible outcome.

The TNFG Acid Emergency Plan as executed -

1. Over $100k of available credit card available,
2. Around $1,000 to $2,500 worth of cash flow management per month
3. Float of about $1,000 in the Bank Savings Account
4. While I can’t create passive income out of nothing,
5. We can reducing investment rate by as much as $3,000 per month,
6. There is about $7,000 worth of reimbursable medical claims from our HSA with $30,000 invested float that could be cashed out, and
7. Finally, we can take from investments.

If this all fails, we roll with the hits. We can sell homes and net the capital gains. It’s an emergency, the best you can do is stay fluid. I’m never to big to go back to work on a McDonald’s grill. Work is work.

Also make sure you keep your financial documents in order with an emergency binder. Learn how to create one here.

Originally published at https://theneighborhoodfinanceguy.com on April 24, 2022.