Emergency Funds – A Simple Guide
Emergency Funds - A Simple Guide
Burst Geyser! Tyre Blow Out! Load Shedding Blew Your Appliances! Medical Crisis! Retrenchment! Engine Failure! Broken Spectacles!
This list is by no means comprehensive. These are some of the events that could cause financial distress in your life. Do you have money, at hand, to bail you out?
This is where your EMERGENCY FUND steps in, to save the day.
Why Have An Emergency Fund?
Well in short an emergency fund, is a self insurance fund to save your backside when life throws you a curve ball and you need instant funds to take care of it.
Some of my clients call this a rainy day fund, squirrel fund, get out of sh1t fund or save my backside fund.
An Emergency Fund is all of the above and so much more.
It is a “help you sleep well at night” fund.
How do I get an Emergency Fund?
The first step is to decide how much you need. I recommend a minimum of 3 months of living expenses. This would be enough money to keep a roof over your head, food on your table, allow you to keep moving (transport), keep you connected (data and voice), as well as ensure your insurance, school fees and other life commitments continue.
If you are self-employed, a freelancer, live the gig life or earn a variable income, then push this to at least 6 months.
The point of this cash fund, is to protect you, give you peace of mind and certainty, that should a life event occur OUTSIDE of your control, you can look after yourself.
Covid and Lockdowns in 2020 and 2021 should be the ultimate lesson for all of us as to the importance of such a fund.
Where should I have my emergency fund?
There are so many ideas, options and thoughts on this that I would be able to write a book about it. Maybe I should.
In short, this money is NOT an investment, in the sense that you put it in equities or property or other volatile growth assets. It is an investment in peace of mind.
Your emergency fund is actually your own insurance policy and when you need to claim, you need it available immediately, without delay or at a penalty fee.
For this reason, I would recommend a money market or savings account at your bank or similar such institution.
Please stop hunting for the “best” return. Yes, your emergency fund should grow in line with inflation, but it is not there to make you rich.
It is there to bail you out of trouble.
When is too much cash, a bad thing?
Well done! You have built a great big fund and now wondering if you have too much. Recently a friend and client of mine, left his employer to start his own business. He has 2 YEARS of emergency fund. Is that too much? For him, no, it is peace of mind.
It is possible to over capitalise an emergency fund? This is really a personal thing.
Once you have 3 months of funding in an account that you can access immediately, it might be worth looking at an income fund (which is a type of investment account), from an investment management company.
For my clients, we have an income fund made up of both passive ETF’s and active Unit Trusts, that gives a return in excess of cash but does have a withdrawal timeline of 5-7 days. This is a great fund, for your capital that you have ear marked for emergency savings but you don’t need instant access to.
What is an emergency? When should you use your emergency fund?
These two questions come up often, and the answer is both objective and subjective.
An emergency, in my mind, as I said earlier, is one that will leave you in financial distress should you not resolve it as soon as possible.
Like your laptop dies and you need it for work.
Like your car won’t start and you need to replace the battery.
Like your geyser explodes, floods your house and your insurer needs time to assess.
Like lockdown strikes, your boss can’t pay your salary, your tenants can’t pay their rental but all your bills keep piling up and the bank wants their bond payments.
Like you can’t breathe and must be rushed to hospital or your will DIE.
In these situations and many more, having instant access to cash is far better than accessing debt (at high interest rates) or worse yet, not having money at all.
Please have an emergency fund. Trust me on this one. I recommend it and that is financial advice! There are a few more hidden benefits of an emergency fund – what do you think they are?
If you are not sure, here are some additional resources whilst you do your own research:
Book a free chat with myself or one of my financial planning partners.