Our comfortable level of frugalness is frequently the subject of dinner conversations at our table. It usually starts with me bringing up a new idea or money saving method for us to try at home and my husband and I discussing whether that it is something we need to do. However, there come times when you need to strip your expenses to the bare minimum whether you are comfortable with that or not.
This morning I read Jeff Opdyke’s latest column about his need to revisit his budget due to an upcoming loss in income. It got me thinking, what would we do if my husband (God forbid) lost his job and we had to live off our emergency fund. What are our bare expenses and how long will the emergency fund last us?
Right now, we save more than 20% of my husband’s income. That would have to stop for a while. We would also have to reevaluate our monthly bills. Our cell phone plan would be one of the things that would go first, cut back from $60 to $20 for a prepaid phone. Cable sadly would have to go. Our cable includes phone and internet and our monthly bill is usually around $200 because of international calls. We will need internet for his job search so we could bring this one down to $110. Gas, electric and car insurance bills would remain the same because I really think our demand of those services is inelastic and we need the same level of coverage on our insurance. In average those three bills total $350. For the last three months we have spent $400 in HBA and food (including eating out). Let’s assume that stays the same. Our gas expense would go down since my husband wouldn’t be driving to work. Mortgage bill stays the same for the first six months.
All of this trims our monthly expenses by 27% and extends our emergency fund from six months of expenses worth to eight. That’s not very much is it? This exercise just made me realize that the bulk of our expenses is very inflexible (mortgage, insurance, basic utilities), which underlines the need for a sizable emergency fund. I understand even more how easy it is to fall in hard times when you are not adequately prepared for it.
In times of financial hardship it is necessary to cut back on your expenses to the minimum. However, as my exercise has shown, cutting back on some of our basic expenses is not possible in the short term. What happens when these basic expenses represent the majority of our household costs? We can dig ourselves in the hole pretty quickly even with a nice emergency fund when a financial hardship lasts longer than expected. It seems it is true we can never be fully prepared.
How long will your emergency fund last you if you had to live off it?