Why You Need a Plan B
February 26, 2016I woke up one morning recently and scrolled through my emails on my phone before getting out of bed. I was shocked to see that one of my coworkers was involved in a hit and run accident. A car came barreling through an intersection, hit her car and drove away. She was injured in the accident and was, a day later, more upset that her workout routine was disrupted than being in a pretty major accident.
The morning of the accident, she was supposed to do a full day of one-on-one coaching sessions with the employees of one of our client companies. Needless to say, we weren’t going to allow her to even consider working from the ER, which was her initial thought! (Did I mention that she’s a wee bit competitive and wouldn’t let something silly like a car getting totaled stop her from accomplishing what she set out to do that day?)
As a business, we needed a contingency plan for that day and we built that into our process. For any event on our calendar, we have a planner assigned to that event and we have backup plans. Sometimes, it’s good to have that in your real life as well. As we have all experienced (unless you’ve lived in a bubble), life presents us with mini disasters that we have to recover from periodically.
When I bought my first house, it came with a home warranty that protected against appliances dying within the first 6 months or 1 year window. (It was long ago so the time frame is fuzzy.) What I remember now is that after just weeks of the warranty expiring, the dishwasher, hot water heater and dryer all died. I needed 3 major appliances replaced within days of each other.
As a new homeowner who had just thrown most of my savings at the down payment, I was a bit pressed for liquidity. I didn’t have much of a cash cushion. But I did have credit cards and the place I bought the appliances from had 0% financing deals so I financed the appliances at 0%, made payments, and when the time frame for 0% ended, I transferred the balance to a credit card with 0% interest and eventually paid the balance off.
I didn’t have cash on hand, but I did have my Plan A and Plan B in place. As anyone who knows me will attest, I love to have a plan B in place. Usually, there’s a plan A, B, C and D.
I can’t say that a credit line from a retailer and a credit card is a great plan, but it was the plan I had at the time. A much better plan would have been to have an emergency fund of 3-6 months’ of expenses in place, but I had depleted my emergency fund to scrape together my down payment. I stretched myself a bit too thin, but I eventually got out of that hole and built a legitimate emergency fund to handle the next set of emergencies.
So how can my misadventures help you? There’s a phrase used in the sports world a lot: “The best defense is a good offense.” Translating that into financial terms, the best way to prevent disaster and to be able to ride out a financial storm is through a very strong emergency fund.
Surprisingly (or not), most people that I talk to do not have one! It’s the most overlooked and, in my opinion, most important part of maintaining a high level of financial wellness. Without an emergency fund, when “life happens” it could result in taking on credit card debt. Fortunately, I was in a position when I depleted mine that allowed me to take on some debt but not pay interest. Those offers aren’t always available, depending on the type of emergency and your personal circumstances.
Please take a look at your financial life. If you don’t have a solid emergency fund (I suggest $1,000 as a “starter” emergency fun, ramping up to 6 months of expenses), make that a top priority. It can prevent a snowball of bad luck and unfortunate consequences.
And while you are building this most critical piece of your financial plan, develop a plan A and plan B for how you’d cover a major calamity until your emergency fund is able to handle it. You never know when you might need a contingency plan, and waiting until you need it might leave you in a vulnerable position. Don’t let that happen!