Do you have an Emergency Fund? If you do super high-five! If you don’t it is something you absolutely should get building asap because sooner or later an emergency will happen and the last thing you want to worry about is the money required to get through it.
This post is a little different to my usual ones – a project of a different sort. I’ve been doing a lot of learning about personal finance and budgeting, improving my financial literacy and setting some goals of late. This is mostly because I’ve had a few realisations this year:
- I want to be entirely debt free – this includes university debt, credit card debt, personal/parental debt, any money I might owe any institution or person.
- I am no longer a student and working full time – thus no.1 should be a manageable task
- I want a cushion, some financial security and not to live paycheck to paycheck.
- I have never created my own budget and kept to it or learnt about ISA’s (Interest Savings Accounts) or investing.
- By the time I’m 30 (3 *gasp* years from now) I want to have ticked off all of the above – debt free, have financial security, a decent savings account and a basic investment portfolio.
No mean feat, my combined current debt is $28,000 (thanks mostly to university fees and travel – totally worth every cent), at the moment my income is minimal (you’ve gotta start at the bottom in my industry, no matter how schooled you are) and investing is still a foreign language to me (I’m working on it though). However rather than get overwhelmed by all of this I decided to prioritize and set achievable, realistic goals, and then start from the start. For me the start is that I don’t have an emergency fund any more. I have no set aside money for when disaster strikes and my income can’t cover it and this stresses me out. Everyone should have an Emergency Fund and if you don’t then this post is a must read.
Emergency Fund: An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort (definition from Investopedia)
Emergencies are such events as job loss, major car accident/repair, natural disaster (flood, hurricane, earthquake etc), unexpected medical and dental bills, death in the family, major home repair (electric, roofing, asbestos removal). The first two things you must decide is how much money your Emergency Fund should hold and where to keep it.
How much you put aside in your Emergency Fund is really a personal decision and set by personal circumstances. General guidelines are between 3-6 months of essential living costs (mortgage, gas and electric, basic groceries) and in the current economic climate these have even been pushed back to 6-9 months. Once you do the sums this can be quite a substantial amount of money. Don’t be discouraged, any amount is better than no amount, start small and add to it gradually to build it up. Aim for $1,000 initially, an amount that can cover at least minor emergencies and stop you using credit cards or high debt alternatives at least to start. Even if you can only set aside $50 month, that’s $600 after a year (not including interest accrued if it’s in an ISA) and $600 can make a big difference.
Where to keep it?
You want your Emergency Fund to be kept in a place that is easy to liquidate (hence immediately accessible in an emergency) but that you won’t be tempted to dip into for non-emergencies (such as that 55inch TV or to die for shoes). ISA’s or high interest earning accounts are, in my opinion, the way to go. Not only is it a separate account from your main banking accounts it will give you passive earnings on top of whatever you put in. I would also suggest treating your E.F. as a bill that gets regularly paid – set up an automatic monthly – or weekly – debit with your bank from your main account to your E.F. account. This way you’re building it without even thinking about it.
So now all that’s left is to get started! Do the math, decide on your E.F. goals and set it up! Personally I’m starting with the $1,000 beginners goal as I am starting from scratch, do not already have $1,000 that I can immediately transfer and have debt that I must pay off at the same time. I figure it will take me 3 months to save this amount and I’ll then transfer it to an ISA and set up a standing order for monthly deposits from my main account. My next level goal will be the 3 months living costs.
Good luck and I hope this post helps!