Why You Need An Emergency Fund

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Life happens, it’s what it does! 

Despite your best laid plans and attempts to control the chaos – the only thing you can be absolutely certain about is that things you didn’t plan will happen.

When they are things we like, we call them serendipitous, surprises, gifts…

When they are things we don’t like we call them disasters, emergencies, lessons…

The truth is, they are none of those things, they are just life doing life.

The more important truth is that just because we can’t predict when these “life happenings” will happen, doesn’t mean we have to be thrown off kilter, or worse, be sent into a downward financial spiral when they happen.

One of the ways to cushion the impact and give ourselves financial resilience is with an Emergency Fund.

An Emergency Fund – What it is, why you need it, where to keep it, and what it serves in your life, that is what this video is all about, watch it now.

Here’s a terrifying statistic.

In the developed world, it’s estimated that 63% of households could not come up with the equivalent of US$1,000, £800 pounds, R10,000, €800  in the event of a real emergency.

How terrifying is that?

When a to-be-expected, unexpected life event happens, these people have to either sell something or go into debt in order to cover the associated cost.

That is not freedom. That is not a way to be living. That is walking life on a knife edge.

This is why so many people end up in devastating financial situations.

In other terminology,

That’s what an emergency fund is all about.

Your emergency fund is there to catch you.

It’s quite literally there to have ready liquidity, in the form of cash, so that when an emergency happens – something where you absolutely have to come up with money to deal with it – you have it.

You don’t sell your investments. You don’t go into debt. You go to your emergency fund.

The first key characteristic of your emergency fund is that it’s cash.

It’s not credit on your credit card.

It’s not money sitting on your mortgage that you can access.

It’s not Aunty Mabel that you could coerce into lending you some money.

Your emergency fund is kept in cash that you can access immediately. It could be sitting in a bank account, but some people will keep it in cash stashed away somewhere safe.

You must put your emergency fund in place Before you pay off debt. Before you start saving. Before you start investing.

This is vital, because the presence of an emergency fund in your life will prevent you from doing some really disastrous things to your finances.

Your Emergency Fund keeps you away from the financial cliff edge, and gives you that buffer.

You want your Emergency Fund to be around $1,000, R10000, £800 pounds to €1000.

It must be held in a different bank account from your day-to-day transactional account. If it’s sitting in your day-to-day banking account, you’re going to spend it, because yes, you’re going to have a shoe emergency, an ice-cream emergency, a must please my kid / dog / goldfish / partner kind of emergency…

Those aren’t the emergencies we’re talking about. Your Emergency Fund, is for real emergencies.

The point of an Emergency fund is so you don’t have to go into debt, in the event of an emergency, however, while you are building up your Emergency Fund we still want you covered, and using a credit card is better than using your assets (only while you build up the cash). But you don’t carry this card around, you put a low fee credit card in a tin of water into your freezer.

Why in water? Why in a tin? It’s so it freezes and you have to wait to let it thaw out to use it. This gives you time to determine if it really is an emergency. And it’s in a tin, so you can’t try rushing the thaw by putting it in the microwave. LOL!

A vital component of financial wellbeing is financial safety.

The first stage of creating your financial wellbeing is providing a catch net, a safety net so you are able to go and do more, experience more of life, while feeling safe.

This is so you’re not waking up at three in the morning wondering if you or your family is going to be okay financially.

Your Emergency fund is the first layer of your safety net, which then gets built up to provide a full cash safety net equivalent to 3 to 9 months of your basic living costs.

To determine what your basic needs cost, you have to know what your lifestyle costs. You need to know what your expenses are.

If you don’t yet track your expenses and have your income statement to know how money is flowing through your life, get yourself a copy of The Wealth Chef Book, together with the resources that go with it, and make that happen.

When you know what your lifestyle costs you, your basic living needs are the expenses that relate to your survival and access to earn.

Basic living needs do not include luxuries, entertainment, clothing and holidays and the kids’ activities. This is food, shelter, security, and access to earn.

Once you understand your basic living needs monthly cost, you then determine how many months you want your cash safety net to cover.

I say between 3 and 9 months because whether it’s 3 or 6 or 9 depends on your own level of safety and the support you need to feel safe. You can do a gut check-in.

Ask yourself…

  • If I knew I had my basic living needs covered for 3 months – would I feel safe?
  • If I knew I had my basic living needs covered for 6 months – would I feel safe?
  • If I knew I had my basic living needs covered for 9 months – would I feel safe?

The point of your cash safety net is…

… if for some reason your current, active income or the way that money comes into your life was to dry out, you would be able to survive until you can find another form of income, without robbing your assets.

You decide whether it’s 3, 6 or 9 months, and if you’re in a relationship, you will want to discuss this with your partner and agree on a number of months that makes you both feel safe.

The person who needs the biggest safety net wins.

The reason I say the partner who needs the biggest safety net wins is because if you’re in a relationship and one of you is feeling stressed around money and is not feeling safe about their financial wellbeing, they’re not going to be able to move to the next stage of financial expansion, which is about really understanding power, expression, creativity and getting money to fuel these aspects of living a juicy fully expressed life.

When you’re in survival, when you’re anxious, when you’re stressed, when you’re worried, you go into contraction, and you can’t make empowered financial decisions. You can’t make good investing choices. Instead you’ll go into just hoarding and safety and risk aversion.

Now perhaps you’re thinking “Ann, I know I can always find a way. I only need one month’s cash safety net. In fact, I don’t need a cash safety net at all, because I believe the Universe will provide”.

You might believe in the Universe’s benevolence, that’s fantastic, we all have to have faith, but here’s the thing…

We have to participate in our own rescue. It is our responsibility to put in place mechanisms to catch us.

So be careful if you’re going too gung-ho on the financial edge, and equally, you don’t want too big a cash safety net either.

Like Goldilocks – not too thin, not too fat – just right for you.

A BONUS wealth tip for you.

While you’re building up your cash safety net you can use income protection insurances to help you cover the cash safety net gap.

Say you have saved one month of basic living needs, you could get income protection insurance to kick in after one month and cover you for the rest of the 9 months. The longer you set for the insurance to kick in, the lower the premiums are, so if you set the policy to only kick in after 2 or 3 months the amount you pay will be significantly lower than if it kicks in after 1 week.

This is how you can combine cash and insurance policies to form your safety net.

So there you have it, your emergency fund and cash safety net.

In the comments below, I’d love to know…

  • How big does your cash safety net need to be?
    Are you a 3-monther? 6-monther? or 9-monther?
  • If you don’t yet have an emergency fund, what can you do to get it in place really fast?

Thanks as always for reading, watching and sharing so generously and for choosing to master this key ingredient money and live your juiciest life.

Remember, your freedom is created just one step at a time and that’s all you need to do. Keep taking that one step.

With huge love

Ann

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5 Comments

  • Nicole says:

    I’ve never heard of income protection insurances here in the USA. Can you share some example companies with policies?

  • Saz says:

    This is great for clarity but feels really daunting. I just agreed with my husband that 6 months is good for us. But how we would ever manage to get that much seems far off. Even the £800 seems pretty hard to reach.

  • Andrea says:

    Putting the emergency fund in place changed my life! No more heart sinking when an unexpected bill arrives.
    My buffer is £1000 emergency fund and I’ve built up a buffer of 9k in premium bonds (so I can access in a couple of days but not so easily I could spend it on holidays etc) I know that work will give me 6months pay if I can’t work so for now 9k would easily provide for me for up to a year. When I retire I intend to expand the buffer to 20k so I have at least a years money if needed.

    • Ann Wilson says:

      wooo!!! that is fantastic Andrea – well done and thank you for sharing how this one step changed your life – it really has such a huge emotional impact that then allows us to feel safe to do other things and expand in other ways.

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