Putting Out Fires

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Recently, I had a long conversation with an old friend of mine whose opinions and ideas I value greatly.

He asked me what personal finance mistake I see people asking me about the most often on The Simple Dollar and, after a bit of thought, I told him that the most frequent mistake I see is that people are constantly blindsided by unexpected events. They plan for their lives to go incredibly smoothly, but when something disrupts that smoothness, they’re often in panic mode. Even small things, like a car repair issue, can upset all of their plans and send them back into debt.

“Well, how do you solve that?” he asked.

The answer is fairly straightforward. Have a nice cash emergency fund in place. Make sure you have the insurance that you need – life insurance and so on. Keep working on your skills, particularly ones that transfer well from job to job.

When you don’t do these things, the unexpected events in our lives catch us blindsided and unprepared.

He thought for a bit and then said something quite thought-provoking. “Most people spend an awful lot of their time running around putting out fires in their life. Your argument is that a bit of time spent now to prevent those fires ends up saving a ton of time and money over the long run.”

Bingo. Most of the unexpected expense in adult life comes from running to the fire, not putting the fire out.

We know that eventually our car is going to break down. We know that there’s always a chance that we could lose our jobs. We know that our appliances are going to fail in our home sometime in the next few years.

Yet many of us never think about it. Instead, we enjoy our lives under the assumption that these bad things will never happen.

And when they do, they hit like an atom bomb. We start living off of credit cards, racking up debt like there’s no tomorrow. We finance the repairs and find ourselves giving more money in interest than we give for the actual purchase. We waste time shuffling our money around, robbing Peter to pay Paul.

It’s stressful. It’s time consuming. It’s a guaranteed waste of money. And sometimes it catches up to you and bites you hard.

What’s the alternative? Spending less than you earn – even if only by a little bit – and simply socking away the rest. The exact method of “socking it away” can be argued and analyzed until the cow comes home, but the person putting $5 a week into a 0.5% savings account will always beat the person saving nothing at all.

Many people push back against this because they’re already spending everything they bring in and they simply feel there’s no room for such savings and planning.

Here’s a very simple solution for all of you who are finding that you’re putting out way too many fires each day.

Find five simple things to change in your life. Maybe you can skip a morning coffee two days a week. Maybe you can install a programmable thermostat in your home. Maybe you can start a carpool. Maybe you can cook at home one more night a week. Maybe you can switch to a generic product from the name brand.

Find five little routine things to change in your life. Just little things – nothing big or life altering.

Once you’ve switched, figure out how much each of these things is saving you per week. The coffee routine change saves you $5 a week. The meal at home saves your family $12 a week. The generic product saves about $1 a week. The programmable thermostat saves about $11 a week.

Total those amounts up. Then open an online savings account and set up a weekly automatic withdrawal for that total amount. Maybe it’s $100. Maybe it’s $11. Whatever it is, have that much transferred out of your checking account each week. Then forget about it. After all, that money is already accounted for.

When the next crisis that you can’t possibly solve comes along, check that account. Suddenly, instead of panicking and running around trying to put out the fire, you find that the fire is already taken care of. A few mouse clicks and the bill is paid.

Today’s the day to stop putting out fires and start preventing them.

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16 thoughts on “Putting Out Fires

  1. That’s a nice way of describing the need for an emergency fund.

    Putting out fires was also what I called people wasting my time and messing up my schedule when I started on a new job. I had to budget an hour of time to “putting out fires” in my schedule or they messed up my entire day.

  2. I agree with this completely! This is the number area of problem for our family. However, the dilemma is ongoing–we are deluged with unexpected expenses (a stream of sick kids where even the copay and prescriptions add up to triple digits), or extreme car repair (Dec. 09, $2,600) and find it extremely difficult to cut back enough to get ahead of these. We just keep trying to find more to cut back on, or make from scratch.

  3. This is a great method to save more.
    I have to admit it is extremely difficult to convince myself to put more money away. “there is no room…”I often say.. But if I just set up an automatic deduction every month, eventually I adapt to it and the money is so useful to use after a while of saving.
    It almost felt effortless..
    Same old same old: pay yourself first!

  4. Having a well stocked emergency fund is a preventive maintenance item for your life. It is as important as good physical health, an emergency fund is the primary defense for keeping good fiscal health.

  5. i hope the friend was john, and i hope you got an update on his land, with pics. THAT was the best post ever. hoping for a followup.

  6. I read a lot of personal finance sites and I’m continually amazed at how often it’s recommended that “emergency funds” should cover things that are known future expenses. People have their heads in the sand; it’s a certainty, not a possibility, that your washing machine is going to break at some point. But have you put money aside for that eventuality? You’re going to need to replace your vehicle somewhere down the line… but do you have money building for that goal? Do you turn to your emergency fund when your insurance premiums come due? No, you probably put money aside for that bill so when it comes, you’re prepared. Why wouldn’t you do the same for other expenses you’re 100% certain you’ll face in the coming years? In my opinion, an emergency fund should be set aside for unforseen expenses–true emergencies–and job loss, especially if you’re going to cap it at 6-8 months of expenses like popular advice dictates. An EF is better than nothing at all, but when you add up the known future expenses that you’ll be facing over the next X years, is the EF enough to cover them? And if it is, what happens if you face UNforseen expenses in addition to those? People are beginning to see the need for a healthy EF, but I wish PF bloggers and others who discuss such things would place additional emphasis on planning for known future expenses with something OTHER than the EF.

  7. It used to be called a “rainy day” fund. Somewhere along the lines, people thought it wouldn’t rain again, forgetting that such a thing is called “drought.”

    These days, with a big hefty emergency fund, I’ve had a few people say “Well, you’ve got money . . . .” My reply is always, “No, I don’t. I’ve got safety, and it’s not the same thing.”

  8. Someone ought to sell insurance for that sort of thing, or lump it in with homeowners’ policies.

    One of the ways I deal with “fires” is to have certain flexibility in my budget, expenses that I take only if I don’t suffer a “fire.” So like when I needed dental work this year, I was able to bring myself back into balance was to cut some fancy meals and cell phone extras. Or if I get a gift card, I’ll leave it off my assets until I suffer a “fire,” then spend it against some other expense.

  9. I think Marianne (#6) makes a valid point. It does make sense to save for recurring expenses that are not “emergencies” or monthly in nature. Mary Hunt talked about this in her book “Debt-Proof Living.” She suggested setting up a separate savings/checking account to save for such expenses. I’m now trying to do that myself and have set up savings accounts with ING to do that.

    Get an emergency fund, sure. But don’t forget to prepare for those expenses that “sneak up” on you if you don’t plan for them.

  10. I am always quite surprised when a friend tells me he/she has spent to much money because of “unexpected events”, usually meaning that the tires needed replacement on the car or the 20 year old fridge had to be replaced….These are expected events and obviously you need to plan for them an emergency fund is a good idea for this.

  11. Stan, we do just that. We’ve got an ING account for Christmas, for auto repairs, for home maintenance and so on, in addition to our emergency fund. That way the emergency fund only needs to be used for TRUE emergencies.

  12. I think the “prevention” end of it gets lost in the shuffle.

    Car preventive maintenance (oil changes, air filters, etc), home preventive maintenance (air filters, routine inspections) and on and on and on.

    Usually, when a so-called “fire” comes up in my life, most of the time it could have been prevented, or lessened, with a little preventive maintenance.

  13. When ever my friends call me to go out clubbing, I easily spend $100 on the night buying drinks, food, etc. They usually call me the day of or a couple hours before, so I don’t usually know for sure when they want to go out.

    One of them asked me the other night how I can afford to blow all this money. Well, I budget $100 a week for “going out” so I can cover it, and when I only go out 2 or 3 times a month, I usually have an extra $100 banked. So, if I do end up going out more than once in a week, I’m not spending more than I’ve budgeted for, and still only spending what I’ve already allocated previously and haven’t used yet.

    Seems like a lot, but I get to see most of my friends and hang out with most of them all at once. And if you budget for it, it doesn’t sting (as much).

  14. Wonderful advice! An emergency fund is a financial life preserver. I like to think of it as another bill that has to be paid each month–one that takes priority over cable, cell phone, and other discretionary expenses.

    I’m glad that you pointed out that there’s almost always money to be saved somewhere. While it may involve a little sacrifice (like skipping the morning coffee, or weekly takeout), the reward can be significant!

  15. This is one of the top 5 posts that Everyone should read. I agree and this is from someone who did the direct 5% of each paycheck into a seperate checking account. But now that I am unemployed, I forgot this wisdom….I will start today.

    I went to a financial/debt adviser that several credit unions got together to have her speak to their members about debt. And she said, if you have to start with $1.00 a week, then you start with $1.00 a week. So the tellers at the credit unions know that people putting $1.00 or more into a special savings account were from her seminar.

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