The Scriptures encourage us to plan for the unexpected and equate planning with being wise. “Go to the ant, O sluggard, observe her ways and be wise, which, having no chief, officer or ruler, prepares her food in the summer and gathers her provision in the harvest” (Proverbs 6:6-8).
Families are best served if they make getting out of debt their first priority.
Their second priority (priorities one and two can be worked on simultaneously) should be to establish contingency funds.
Even if families have not reached their goal of becoming debt free, it's still a good idea to begin setting aside some money into a contingency fund.
This type of fund is not long-range savings for college or retirement; it is non-allocated short-term savings.
Without contingency funds, if there were emergencies, families would have to rely on credit and, ultimately, end up deeper in debt.
Simply put, without contingency funds, borrowing would be a foregone conclusion, the use of credit would become a lifelong necessity, and debt would become a way of life.
Only after these two primary objectives are reached should families think about investing in stocks, bonds, or mutual funds.
The need for contingency funds
There are two reasons why families need contingency funds: for emergencies and for major expenditures.
Emergencies. A contingency fund is first an emergency fund for dealing with the unexpected. By having this money set aside and readily available, emergencies can be paid for without having to borrow.
Unexpected expenses are not only bitter disappointments but they can cause a painful realization if people do not have funds set aside to cover the expenses. Even if some surplus has been set aside, there is little escape from personal or family difficulties that result from financial emergencies.
When there are crises or unexpected emergencies, much frustration can be avoided if a contingency fund has been established to help absorb the distress of the crisis.
Major expenditures. A contingency fund also can be used to finance major expenditures that are not in the family operating budget: replacing an old car, buying furniture, replacing appliances, or remodeling.
Whether contingency funds are used for emergencies or for major expenditures, a good rule to follow is that whenever funds are withdrawn from contingency accounts every effort should be made to rebuild the fund as quickly as possible.
How much should be allocated?
Families should allocate a percentage of their income to contingency funds. Although 10 percent is preferred, a minimum of 5 percent of Net Spendable Income should be placed in contingency funds.
Even though some financial planners recommend keeping a specific amount (like $10,000 for example) in contingency funds, most planners recommend maintaining a minimum of three to six months' living expenses for families who have steady incomes; for those who have fluctuating or seasonal incomes, six months' living expenses is best.
This does not mean that large amounts of money should be saved while failing to pay creditors, but a good habit to develop is to save a small amount on a regular basis.
How to save
Families should make specific guidelines on how they intend to fund contingency accounts. Then they must stick to those guidelines and not allow compromise or a lackadaisical attitude regarding funding the account. God commands every believer, “Do not be conformed to this world, but be transformed by the renewing of your mind” (Romans 12:2).
When it comes to saving, despite best intentions, it's easy to rationalize putting it off until the next paycheck.
Therefore, it often helps to have money set aside automatically before families have an opportunity to spend it. There are two paths that are the most common to automated savings.
- Families can sign up to have part of their income automatically deposited into savings accounts at banks or credit unions. In these institutions, savings are insured and available for withdrawal without penalty.
- For a higher rate of return, families can set up automatic transfers from bank accounts to money market funds. Such funds typically accept transfers of $50 and up on a weekly, biweekly, or monthly basis.
“There is precious treasure and oil in the dwelling of the wise, but a foolish man swallows it up” (Proverbs 21:20). The common attitude presented in the Bible is to save on a regular basis, and it is important that Christians develop good habits to replace bad habits.
The discipline it takes to do that can be very difficult, but laying this foundation is vitally important; and, if it can be managed, contingency funds can give families the freedom to start again when they find themselves facing unexpected expenses. So, be diligent and be prayerful.