Emergency Fund

If you are serious about your financial life, you should have an Emergency Fund.

Most financial experts would say that’s a smart thing to have.

Unfortunately, at some point in our lives sh*t is going to happen, so we better be prepared for rainy days.

We can lose our job, we can have a car accident or our fridge may decide it’s time for a replacement.

“All sorts of things can happen!”

This is where an emergency fund comes in. It’s basically money on the side and easily available to pay for unexpected expenses.

As the name of the fund illustrates, this money is for an EMERGENCY! This is not money for a new car or for some fancy vacations.

An emergency fund is there to cover circumstances we cannot predict.

Just think about the current environment real quick. Do you think you could predict such a worldwide crisis as the one we are now?

No one can. What we can do is to prepare for impact…

How Much Should I Save for My Emergency Fund

There is a thing about personal finance! It’s personal so there is no real consensus here.

The general rule is 6 times our monthly expenses. This means that if we need 1000€ per month to pay for our living expenses, we should aim to have 6000€ on the sidelines.

However, you need to assess your own situation. Are you a single or a couple? Do you have kids? Do I work for the public or private sector? How easy is it to find a new job? Can I benefit from social help in case of a job loss?

All of these points are rather important when we want to calculate how much we need.

The emergency fund can be reduced if you are in a low-risk scenario. An example would be a couple working for the public sector with permanent contracts and with no kids.

Now compare scenario A above and scenario B, being a single person with 2 kids working for the private sector. Which scenario is high-risk here? Scenario B for sure.

So be honest with yourself and assess your risk.

My personal choice goes to 6 months of expenses because it works for me!

My advice is to go for an amount that makes you feel comfortable and sleep well at night.

Don’t think risks don’t exist because they do!

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How to Start an Emergency Fund

If you do not have an Emergency Fund, this should be your priority number one. You are not ready for catastrophe, so take action immediately.

Here are the steps I recommend:

  • Open a separate account. If you already have a bank account, you just need to create a second current account or savings accounts, with easy access to money, no penalties, or high fees. I would advise you to contact your bank first and go from there.
  • Add money to the fund. If you have some money aside, transfer it to the new account. If not, consider taking a chunk of your next paycheck.
  • Do not touch it. As I mentioned use this money for emergencies only and do not use it for leisure. Think about is locked money.
  • Save more. Consider saving more money on a monthly basis and add small chunks to the fund. 50€ a month can have a big impact at the end of the year and may do it by budgeting your income with the Zero-Based approach.

Make your fund easily available but no so easily. If you are not disciplined with money, consider having the money allocated to a different bank that you do not use in your daily life. This may help to forget about it!

When To Use the Emergency Fund

What exactly is an emergency? For some, buying the new iPhone can be an emergency…

Jokes aside, an emergency can mean different things for different persons. So my advice is to list what you would consider an unpredictable event that requires money right away.

I have my own list as an example:

  • Car accident/break-down
  • Job loss
  • Disability/personal accident
  • Broken appliances
  • Natural disaster-related

The list is not extensive but you get the point. I don’t include a new computer, vacations or new sunglasses. These are not emergencies for me!

A Final Comment

An emergency fund may seem a basic and fundamental structure to have in place. Yet, some people have more urgent things to plan.

COVID just showed us how life can be unpredictable and throw things at us when we least expect. Don’t take your life for granted because we are constantly at risk.

Stop ignoring risks. You are better off if you prepare to deal with them. Do not let a small loss became a nightmare just because you lacked preparation.

Do not complain about not having an umbrella for a rainy day. You know that someday is going to rain.

Thank you for reading and hope I contributed positively to your day!