Beating Broke

Personal Finance from the Broke Perspective

Avoiding Reactive Personal Finance

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Just what is reactive personal finance?  It’s the management of your personal finance in reaction to events or situations as opposed to the management of personal finance in anticipation of events or situations.

The best example of this is a budget.  A budget is built and held to in anticipation of events in your financial life.  You know that things like your electric bill and water bill are going to be coming and roughly how much they  will be.  That allows you to budget for them and set aside money to pay for them with.  A budget is a great tool in avoiding reactive personal finance.

Why do we need to avoid reactive personal finance?  Because reactive personal finance is disruptive.  You are managing and spending your money in reaction to the events that are happening.  Doing so can cause you to quickly lose control of your finances and find yourself in a downward spiral of poor management choices and, eventually, it can lead to you being broke.

Some examples of events that can cause you to become reactive.  Medical emergencies, blown tires, unexpected social events, and even bills that are larger than they normally are.  Any thing that is unexpected can cause you to spend in a reactive manner.  And when you have events like that, it can often lead to larger problems, like overspending on luxury items to make you feel better.

How do you avoid reactive personal finance?  No plan is foolproof, so it’s not really completely possible.  However, you can make the odds of it happening be cut drastically.  How?  An emergency fund and a bit of willpower.  The emergency fund will give you the available spending power to cover any emergencies that would normally make you spend in a reactive manner.  Instead of trying to react and borrow from somewhere else to pay for the emergency, you can just pay from the emergency fund and not need to react any further.  The willpower comes in where the spending opportunity isn’t an emergency.  You have to have the willpower to avoid last minute and spontaneous spending that could drain your funds and cause you to become reactive when you no longer have the money to pay bills or buy necessities.

The best laid plans often go askew.  But, building an emergency fund and strengthening your resolve can go miles towards avoiding reactive finance and potential disaster.

Realized Benefits of Emergency Funds

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Here and on other PF blogs, you’ll hear us all talking about the need for a well stocked emergency fund.  And, unless you have one, you likely don’t know that we aren’t just saying that because we think we should.  They really do have the benefits that we claim they do.  These last couple of weeks, my wife and I realized those benefits.

Early on March 26th, my then pregnant wife told me that I should probably stay home from work as it was appearing very likely that we would be having a baby that day.  Less than two hours later, we were checking in to the hospital to do just that.  If you’ve been there, I don’t have to tell you that it was incredibly exciting.

The excitement waned as we waited for the labor to progress and then quickly disappeared altogether when the baby began having decelerations in it’s heart rate.  The doctor began making preparations and the birth was expedited.  Rather than wait for the labor to progress as it would normally, my wife was instructed to push with all she had to get that baby out.  Quickly afterwards, the baby (a girl!) was born, and just as quickly was taken to a warming table to be intubated and have her lungs and stomach suctioned and checked.

It turns out that sometime in the weeks leading up to her birth, she had *ahem* pooed in her amniotic sac.  To the medical world, it’s called Meconium.  And it’s pretty bad.  It affects the lungs in that it acts as a stopper for the little sacs that do the oxygen intake.  It also acts as an irritant to the lungs that can lead to infections.  It can be very serious, and can take days, or weeks, or months to completely clear out.

In our case, luckily or not, our little girl was able to kick it in a week.  Pretty average recovery time we’re told.  Now, she’s home and all is well.  There won’t be any lasting effects and we shouldn’t be able to tell the difference.

calculator stethoscopeHere’s where the benefits of an emergency fund come in.  For that week that our little girl was in the hospital, the last thing we wanted to think about was bills, work, or anything not related to the well-being of that precious baby.  We had friends watch our dogs, and my wife’s mother came up for a couple of days to watch our son.  And we spent as much time as we could watching our little girl fight the fight in an incubator.

We didn’t have time to balance our check book, or check our budget to make sure we were within bounds on something.  And now that it’s all over, I can honestly say that if we hadn’t had an emergency fund, it would have been much, much worse.

One of the touted benefits of an emergency fund is the peace of mind that it affords you.  When you know that you have that money to fall back on in an emergency, your mind is free to worry about the things that it should be.  In this case, it was our daughter.  Maybe it would be the car you just wrecked or the house that just burned down.  No matter what the emergency is, you know that you’ve got that extra cushion of money to help pay any bills or expenses that might come up.

I cannot tell you how wonderful it was to not have to worry about that during the week that she was in the hospital.  We certainly didn’t expect to have any problems, but we did.  You may not expect any problems, but they can happen.  If you’ve been putting off the funding of your own emergency fund, don’t wait any longer.  We’re glad we didn’t.  You never know when you’ll need it.

Photo Credit: forwardcom @ sxc.hu