The Evolution of an Emergency

It occurred to me the other day while presenting the Dave Ramsey lecture on budgeting, there is an evolution how budgets might work as a student of money management progresses through life. Consider a typical emergency, $1,000 car repair. They happen.

Before living on a monthly budget, this kind of event could constitute a serious emergency resulting in a visit to a credit card, or something worse like a payday loan company. A loan from an 18% credit card paid back at the rate of $200 a month would result in six months of payments, $1,200. At such a time in a person’s life this could constitute a very serious problem.

After building even a $1,000 emergency fund, a thousand dollar emergency while quite unpleasant and painful only costs $1,000.

After living on a budget for a time, our student simply goes to the auto repair envelope, a real envelope or a virtual envelope in a large single bank account. When the time comes, the money is there. The emergency has no effect on the monthly budget whatsoever.

Finally, after years of consistent effort, the mortgage payment is gone. The unfortunate car owner shrugs their shoulders and thinks, “Well, a little less is going into savings this month.”

You can get there. Step by step. Year after year. You can improve your financial condition and your life.