Why You Should Have An Emergency Fund

Having an emergency fund is absolutely necessary in my opinion and should never be thought of as anything less.

Regardless of your current income level or current ‘job security’, I’m here to tell you job security is a myth.

Anything can and will happen, that’s life…

Nobody ever expected a global pandemic.

This is perhaps the most extreme scenario we are all being faced with right now. How prepared were you? Most of just did not see it coming at all. Did you have any savings in place? Hopefully, you did!

We all tend to think that our jobs are rock-solid stable, being made redundant is what happens to other people, not me right.

Wrong. Nobody can foresee what the future holds. This is the biggest reason why we should all have an emergency fund in cash that is easily accessible rather than being locked away.

Let me give a prime example of why you need an emergency fund. A friend of mine was a second officer for a commercial airline (that’s a co-pilot).

Having been in the job for about 3 years, he was just about to embark on his captain training.

Bam! Said pilot gets made redundant and the airline collapses amongst many others. Where is he working now? A large warehouse for a very large online retailer we all use. He has bills to pay!

A job that many hold in such high regard and a ‘job for life’. It is looking like at least a year or so before he will be flying again, even that seems optimistic.

How Much Should I Have In My Emergency Fund

This is a hotly debated one. What you need to consider is your total monthly expenses vs your essential monthly expenses.

What I mean is, eating out two times a week is an expense you simply do not need to have.

For most people, your critical expenses to consider for your emergency fund will be.

Mortgage
Utility bills
Car Payment (hopefully you do not have one)
Food
Insurances eg. house, car etc..
Fuel
Debt/Credit Card Payments (Again, hopefully, none)

Let us say that your monthly expenditure is £1000 it may be way more or less but it is a nice round number.

In my humble opinion, I think a bare minimum of 3 months expenses should be in your emergency fund with 6 months being the ideal.

Although I think it best to add 10% at least to your monthly number with 20% being ideal. Reason being that if it does take you the full 3-6 months to find a new job, for instance, you have some extra cash on hand should the need arise for something unforeseen.

If you are having to use your emergency fund for any other reason bar job loss then it is not the end of the world.

However, the fund should be replenished at the earliest possible opportunity. Whether it takes 2 months or 6 it should be built back up to the full amount.

Do not get complacent, as discussed earlier ANYTHING can happen.

Should I Build My Emergency Fund Before I Start Investing

Another question that many people are faced with. In an ideal world, you absolutely should build your full emergency fund before you start investing.

Whether you go for 3 months expenses or 6 will depend on your own circumstances and risk tolerance.

In reality, most of us want to start building our portfolios sooner rather than later.

If push comes to shove and you absolutely had no choice, you could cash out your stocks in a dire emergency, hopefully for a profit. This would be a last resort move for sure.

Putting 70% of your disposable cash each month into an emergency fund and 30% into your portfolio is one tactic. You can adjust the percentages to your own liking of course.

One could even adjust the percentages as your emergency fund nears your target. In doing this we can start to build our dividend investing portfolio and see those dividends start rolling in.

Whilst not recommend it is a compromise.

Think of it this way. Doing one or the other, hopefully, both. You are already light-years ahead of most of the population who are living month to month, paycheck to paycheck.

No need to be so hard on yourself for choosing to start investing before you build the emergency fund.

Gain more perspective on your finances and investing in general with some of my favourite books, try to read at least one book a month to broaden your outlook.

Where Should I Keep My Emergency Fund

For my UK readers, I think our best option currently is in an online Marcus Savings account. Due to the current climate, the interest rate has fallen to 1.05%, when I first opened my account it was at 1.29%.

This is not going to make you rich, but it beats your high street bank by miles.

A nice bonus is the interest is calculated and paid monthly. There are no penalties for making withdrawals, unlike some ISAs. Whilst it is true you could get slightly better interest rates by using an ISA, often there are such penalties or time constraints.

Deposits are instant from your current account. Withdrawals will normally clear in around 2 days.

I am happy with that. You could always use your own bank’s online saver if that bothers you. Although the interest rate would be significantly lower, the funds would be instantly available if needed.

What To Do Once You Have An Emergency Fund

So, you have come this far. You have your 3-6 months + 10-20% in your emergency fund. Now what?

Leave it alone. Do no touch it. Think of the cash as off limits.

Yes, I know you want a new bike, a new watch, computer…

Whatever it may be that you so desperately want, remember, it is a want and not NEED.

I suggest you create a second fun pot that you can spend on whatever your heart desires. Want to buy a £1000 suit, do it!

Do it only if you are already investing a good 10-20% of your income and have built your emergency fund already. Now you have built your fun pot to £1000 or whatever your target may be, go ahead and treat yourself.

Most people find that once they save up for something rather than impulse buying it, they no longer want it. Get into the habit of taking at least one week before buying any big purchases from your fun pot.

In doing this, most find they no longer WANT said item, if you do then get it!

Life is too short, just make sure you really do want it first. Allowing at least one week to ponder the purchase.

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None of the above should be used as financial advice, I am not a professional. Always do your own research.

Thanks,

Sean