Do you remember school fire drills? You’d be sitting in class, not paying attention, and the fire alarm would suddenly go off.
Everyone would calmly get up, line up by the door, and slowly walk a predetermined route out of the building to where you were supposed to congregate. No one panicked. We just walked.
Like clockwork, it happened every few weeks, and we all knew what to do. It got to be so routine that it was a huge surprise when a fire truck showed up.
I didn’t realize it at the time, but those drills showed me the importance of having an emergency plan. When you plan a response while you’re calm and collected, it’s easier to respond when you’re under pressure.
We did it as kids for unlikely emergencies, but we forget that it’s important to do as adults, too.
Financial experts will repeatedly warn that you need an emergency fund. You need a pot of money in a safe place, so you can react to emergencies, big and small, without having to immediately rely on high-interest credit cards or other forms of short-term financing.
Not too many experts talk about a second, very important piece – you need to know what to do as well as how to pay for it. By creating an emergency plan, you can do the research and the planning at a time when you aren’t stressed out. You can make decisions from a position of strength, rather than one of weakness as you react to a situation.
Fortunately, coming up with an emergency plan isn’t hard – it just takes time. Let’s do it together.
Identify potential emergencies.
Start by making a list of all the potential emergencies that worry you. You probably did this already when you decided how much money to save into an emergency fund.
These can include emergencies everyone is worried about like (this list is, by no means, exhaustive):
- A medical emergency
- Car problems
- Home appliance failure
- Home repair or maintenance
- Burglary or car break-in
But the list also can include issues that are specific to things you know about yourself and your life.
For example, if you own a car that is brand new, your risk of car problems is relatively low. You can earmark less for car problems. On the other hand, if you own a car that is 5 years old with 80,000 miles on it, your risk of car problems could be higher. If you own a car that is 10 years old with 160,000 miles, it’s even higher. You’ll want to save a bit more to cover a more significant failure.
We also have irregular maintenance costs that are urgent but wouldn’t rise to the level of an “emergency” – we have to take those into account as well.
One example is tree maintenance. We live in a home that is surrounded by wonderfully tall trees. Our homeowner’s insurance protects us against a tree falling, but we are still responsible for maintaining them.
Every few years, we have to hire a tree trimming service to come cut dangerous branches and remove any trees that pose a risk to the house. We end up with some great firewood, but it is expensive to get trees removed, so we have to build up a cushion to cover it. We know we’ll need it — we just don’t know exactly when.
Once you have a list of emergencies, it’s time to research how you’d solve them.
Research ahead of time.
Coming up with an emergency plan when you’re calm and collected is absolutely crucial. We all face unforeseen emergencies, and we know that we generally don’t make our best decisions under duress. The decisions are “good enough” and sometimes you really have no choice. Good enough is, well, good enough!
But if you have the time to research options ahead of time, you want to take advantage of it – your future self will appreciate a short list of options.
Go through each of your potential emergencies and think about how you’d solve them. Do all the upfront research you can, as best you can, so you know what you’ll do if it happens.
One of the revelations in Atul Gawande’s book, The Checklist Manifesto, was the importance of checklists. In high-pressure situations, it’s easy for human beings to miss things. Some of the best-trained people in the world, from surgeons to airline pilots, now rely on a series of checklists to ensure they don’t miss anything. When a two-minute checklist was introduced to eight-hospitals, the average number of complications and deaths fell by 35%.
When you build your emergency plan, you’re building this checklist for yourself. It may not be a matter of life and death, but why not give yourself a higher chance of success?
You don’t have to do it all at once.
When you start, your list of emergencies without a plan will be long. Don’t be overwhelmed.
You don’t have to plan all of them all at once. Some plans are more involved than others.
Keep the list around and, over time, build the plan, so you don’t force yourself into thinking you have to do it all at once. As the saying goes, you eat an elephant one bite at a time. Start with the emergencies that are most likely or most impactful, then work your way down the list.
You also don’t need to go into great detail for every plan. If you’re trying to build a plan for car problems, it can be something as simple as a list of local mechanics and tire shops. If you find yourself with some spare time, you could call them up and find out more information. How much does it cost to replace a tire? Do they have a courtesy shuttle service (or will you need to schedule a ride with someone else)? What have other customers written down in online reviews?
What does this look like in practice? Here are a few examples from my life.
Planning for Home Appliance Failures
When we moved into our home, the home inspector warned us that the existing water heater was in its final few years. He estimated it had around 2–3 years left. An electric heating water tank has a lifespan of anywhere from 6–12 years, so we weren’t ready to replace it yet.
A water heater can fail gently, with a small leak, or it can fail catastrophically, with a huge leak. Ours was in an unfinished part of the home, so we felt confident in leaving the existing unit. The inspector wasn’t too far off: The unit failed halfway through the fourth year. During those four years, I added a bit extra to our emergency fund, because I knew we would need to replace the water heater soon.
I also researched our options, including a very expensive tankless water heater, so I knew what we wanted and who we wanted to install it. When it started to leak and couldn’t be repaired, I looked at my notes, called up three companies to get updated quotes, and had a new water heater installed that week. I was confident we got the best deal on the best unit, for us, and I felt zero pressure throughout.
Planning for Medical Emergencies
The range of medical emergencies can be huge. It could be anything from an ear infection to a life-threatening situation.
Obviously, if it’s life-threatening you already have the emergency plan of calling 911. But what if it’s something that needs immediate attention but isn’t worthy of 911?
It’s a good idea to know what options your health insurance offers. Most have a phone number you can call to speak to a nurse. It’s good to have that handy in case you have questions that don’t require a trip to the doctor.
Also, know which nearby urgent care centers accept your insurance. This isn’t something you want to be thinking about while your child is in need of stitches and is bleeding out of a gash on their face. If this happens, chances are you’ll just Google the closest facility and go. But if you knew that the one 2 miles farther away accepts your insurance, it might be worth a few extra minutes of driving.
Same with emergency rooms. Know where they are and which ones are in-network. This could save you a lot of money.
I had a friend deal with this recently. Her son woke up at 2 a.m. struggling to breathe. They quickly took him to the urgent care that was about a mile away. But it turns out that it wasn’t an urgent care – it was actually a freestanding emergency room. I didn’t even know there were such things as “freestanding emergency rooms!” (Neither did she!)
The bill was $6,000 instead of the $150 that urgent care would have charged for a breathing treatment. A little bit of planning ahead could have saved them thousands of dollars.
Planning for Unemployment
Planning for unemployment is definitely trickier. The specifics of the economy and your industry will play a big role in determining how long you will be unemployed. But that doesn’t mean you can’t have a plan for it.
Go through your budget and get an idea of what is the minimum you could live on. What services will you cancel? Will you still want to go to restaurants? Will you need to travel? At what point do you make even bigger cuts like going down to one car or keeping the kids home from daycare?
Also, figure out exactly how much you will need in an emergency fund to cover you in case of unemployment. If your nest egg isn’t quite there yet, create a plan to get it to where it needs to be.
A lot of people have a side hustle already going in case they lose their job. It’s something that will provide a little extra income while they are unemployed. Some side hustles can even be ramped up to a full-time business if the need arises. It’s just one more reason why having a side hustle is a great idea because it offers a small measure of insurance.
It won’t catch everything.
Our plans aren’t perfect, and they’re subject to revision. I try to look them over every few months and update them with anything that changes with our situation.
Unfortunately, the universe of emergencies is far greater than our imagination. We’ve had plenty of unforeseen emergencies, like when a heating pipe burst a few years ago. Several rooms in our house were flooded and our homeowner’s insurance covered the repairs. What we did learn is that our plan needed to be amended with a page of “emergency contacts,” similar to the refrigerator magnets we used to have for Fire, Ambulance, and Police.
For every major “system,” make sure you have contact information for someone you can call for help. This includes insurance agents, contractors, financial advisors, lawyers, religious leaders, or other professionals who can help you navigate an unforeseen emergency.
And hey, sometimes, the best plan is to call a friend!
If you need a place to save your emergency fund, go to ally.com and take a look at their Ally Bank Online Savings Accounts. They have a feature called “buckets” that can help you organize your savings goals.
And if you want more tips on how to better manage your money, please visit my website WalletHacks.com.
Jim Wang is the founder of personal finance blog Wallet Hacks. He uses his engineering background to demystify complicated financial topics to help you achieve your goals. Jim has been featured in The New York Times, The Baltimore Sun, Entrepreneur magazine, and more. He lives in Maryland with his lovely wife and four children.