I know that I was in denial of my true financial situation for many years. It was always a surprise when an “unexpected expense” such as a car repair or trip to the emergency room would come up. I operated under the delusion that I had “extra money” to spend once I had paid my regular monthly bills and had money left over.

After struggling with unexpected situations, I came to accept that there was no “extra money”. I decided to plan for these unexpected expenses in advance by budgeting for them every month. Expenses such as car and house repairs and maintenance may not happen very often but they are inevitable if you own a car and/or a house. The same goes for medical deductibles and co-pays. It made sense to me to set aside money for these expenses each month so I would have money on hand when the expense arose.

Taking this approach has allowed me to avoid taking on debt or raiding my long term savings to handle these situations.

We just completed a financial risk analysis, and it took a long time. But, I am so glad that we did! We were able to do some things to free up some cash flow for us. I just recently quit my job as a nurse to stay at home and raise our newborn baby. We re-financed our car and changed our W-4. This alone frees up a couple of hundred of dollars a month. We wouldn’t have done any of this if we hadn’t analyzed our financial situation.

The various rules of thumb are a great stat for most people and will fit many situations. But they aren’t perfect for everyone, nor do they cover all situations. For example, an emergency fund that covers 3-6 months living expenses doesn’t do much for you or your family in the event of a death, nor is it proactive toward your employment situation.

A financial risk test takes some time and effort, but the information you gain about your financial situation can be invaluable.