July 12, 2020

12-Minute Financial Makeover Step 4 - Keep Cash Flowing with Crap-Happens Plan

Our Financial Makeover Series talks about personal finance basics and lets you figure out what applies best to your own unique situation.

In Part 1, we pointed out to avoid fees as much as possible, especially the devastating recurring ones. We also suggested to open a no-fee online checking account.

In Part 2, we followed up by proposing to use no-fee savings account to organize the projects that provide you pleasure. We insisted on how budgeting can allow you to spend more on things you truly love.

We continued on a similar theme in Part 3, telling you that budget choices can make you feel awesome and emphasized on how it could provide you more freedom.

This time, we’ll talk about another way to liberate yourself from financial worries setting up a solid custom-made contingency plan.

In the financial realm, we often hear about that basic concept to set up a rainy-day fund. Some might argue that their financial days are already rainy, if not stormy.

But we really believe starting an emergency fund can be a great first step to getting out of the hazardous living-paycheck-to-paycheck spiral.

The object is not to obsess about risks. In fact, your own crap-happens plan could allow you to forget about possible misfortunes and free you up, allowing you to truly taste and appreciate life joys and ventures.

Try to Get Money Worries Out of Your Way

We know many of you worry about money even in normal situations, some even worry about finances all the time.

The main objective of the financial aspect of your contingency plan should be set enough money aside to allow yourself to focus on living through tough situations and fixing things for you and your family. Your contingency fund should allow to relieve financial pressure as much as possible in these bad situations.

It’s impossible to anticipate all eventualities, especially the worst ones. But, having some and enough money stashed away for those bad periods sure may help to cope with any situation. No matter how bad it can be.

For instance, losing your job can be very tough both financially and psychologically. Yet, having money aside should at least give you some time to get your act together and focus on finding a new job.

Another example would be if your fridge or car breaks down. Most people often have to move heaven and earth just to scratch sufficient funds for those kinds of repair. The actual hassle of just getting those things fixed is bad enough. At least get the money part of it out of your way.

Because it’s Much More Than About Money

You don’t have to become survivalists, but your contingency plan has to be more than about finances. For instance, everyone should have a plan in place to survive at home for 3-4 days.

Another illustration would be if you are living aboard, you should have a plan to quickly get home if necessary. Many learned that to hard way in the current crisis. It’s enough too late to make plans when a catastrophic situation arises. It’s impossible to anticipate everything but it can be much easier to react and adjust when some plans are already in place.

It’s much easier to think things over when everything is relatively calm, and you are not under the pressures of a crisis.

You should have a general look at plausible eventualities and how you and your family would generally fare with each. Think about the classics: a job loss, unexpected expenses (like appliance or car breakdown), health problems that could affect your ability to work, a car accident, home damage (theft, fire, flood, …), etc. Don’t omit a separation or divorce because sadly, it’s quite common in our hectic so-called modern life.

Adopting a generalized point of view can allow you to accomplish that without getting too much emotion involved. For instance, don’t think about your actual death but rather, about how to financially secure your family if you were not there to support them anymore. Also think about who could take good care of them otherwise.

Some insurance products can help you manage common risks and cover you in case of catastrophic events you could not recover from on your own. We’ll talk about it more in another installment of our series, but you can now note that young people tend to under insure, and older folks frequently over insure. 

No One-Size Fits All Plan

Your analysis still has to take into account your personal situation and your family’s context. In short, you have to make your own decisions and personalize your contingency plan. For instance, you may decide you would need a year to get back on your feet if you lost your job. Employment Insurance (EI) will partially cover for that for most Canadians. How much are you missing to get by for that year?

You can’t expect a generic plan would be suitable for everyone in any situation.

How elaborate is your contingency plan depends a lot on your situation. Some people with a simple situation will be just fine with a basic rudimental plan. Others in a more complex setting will have to set up a much more sophisticated contingency strategy.

In the same sense, unlike many so-called financial experts, we won’t suggest a set number of months in terms of revenue to save in your emergency fund. It’s not called personal finance for nothing. Some people will require a lot more and others less, even in similar situations. For instance, our family’s emergency fund is not that substantial because both spouses have solid public-sector jobs, our insurances provide adequate protections and we have the discipline to only use our home equity line of credit for occasional short-term cash flow purposes.

In a way, it’s a good idea to expect the worst and plan for more than less. Even if it’s not probable, some people will only expect perfect slow pitches out of life. Most will anticipate some bad breaks from life and easily deal with usual fastballs, some changeups and occasional curveballs.  But even those prudent folks most likely won’t foresee life throwing then a few screwballs or even worse, the dreaded knuckleball.

Don’t just set your emergency fund value on a hunch or your comfort level. Take time to make actual calculations. Simulate the financial impact for each of the usual suspects mentioned above. 

Learn to Love Buffers

There should be an income replacement facet to your overall crap-happens plan. But, it’s probably as important to use buffers to help you face unpredictable expenses.

This is especially true for the self-employed.

Even with a regular paycheck, you will have to deal with random expenses. For instance, appliances will rarely give you an advance notice before breaking down. You must have some flexibility in your finances to pay these unforeseen expenses and manage your cash flow. A regular paycheck only means your inflow of money will be more predictable.

Folks with unregular revenues have to negotiate with even more hurdles, because even their income can be variable and unstable. It will often suddenly fall with the most unfortunate of timings. If you are in that kind of employment situation, buffers should quickly become your dearest friends.

We’ll talk more about expenses next time but let’s briefly mention some related points. Most monthly fixed expenses like your mortgage or car-loan payments are easy to budget. But even some regular expenses like groceries will fluctuate. You still should have an idea of the range of many of these variable expenses. That’s where budgeting could help you set limits to your variable spending. Using buffers can also give you some additional leeway.

We believe it would still be a huge mistake to use these buffers or your emergency fund in general to pay fixed annual expenses like your driver’s license renewal or property taxes. These are easy to forget and can give a nasty blow to your cash reserve even if they are easy to predict. Be sure to make the effort to plan and put some money aside for them. 

Get the Process Going

Some folks might say something like this: « That’s too much, we will never be able to save that insane amount of money. We barely manage to make it to the end of each month. How can we put anything aside for that crappy

fund? ».                                                                                       

We would respond by saying you have to start somewhere. And even a tiny amount to begin with can get you in the habit of saving. Furthermore, an emergency fund is probably the best place to start saving.

Probably the simplest way to accomplish this is to set up automatic transfers to your emergency account just after each paycheck deposit. Start small and build form there. You could be surprised how far just 25 bucks here and there could get you.

We like to think there exists three keys to a good contingency plan. First, it allows you to start the saving process. Second, you must automate that saving process. And finally, it should allow you to plan ahead for conceivable emergencies.


By now, after the first three installments of our Financial Makeover Series, opening a banking account for your emergency/contingency fund should be a breeze. So, we will additionally ask you to automate your contingency saving process. Your task is to set up automatic installments to your contingency fund depending on the frequency of your revenue.

For most folks, weekly, bi-weekly or monthly transfers should easily do the trick. It will be a tad more complex for people with irregular income inflows. You’ll note irregular income earners often like to use a percentage instead of a fixed amount for these transfers.

At some point, you could have a mid-term objective, over a couple years, to sufficiently supply your crap-happens fund. After that, you should easily manage to keep the savings process going.

Now that you’ve learned that budgets and having projects can be a lot of fun, it should be much easier to maintain your motivation at a high level.

Speaking of motivating stuff, next time, we’ll talk about eliminating most of the boring kind to additionally supply your dreams and savings.

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