This week for Finance Friday I’m talking about Emergency Funds. Each week I’ll receive at least 1 or 2 queries on Emergency Funds – what they are and why we need them.
Simply put, an Emergency Fund is money that you have saved to help you cover the unplanned. It can help you with anything from the car needing a new part to an unexpected loss of income.
The savvy finance folks will typically recommend that your Emergency Fund should have 3 to 6 months Living Expenses. But it’s important to remember that they are describing a fully funded Emergency Fund when they say this. As usual, I can only tell you what I’ve done from my experience so here is what I did…
When I made my plan to start attacking my debt, I first saved €1000 to my Emergency Fund. For me, this meant that I felt confident enough to start throwing what I could to my debt, knowing I had money there to fall back on should I need it. It also meant that I would have no need to use my credit card and further increase that debt figure. It was my secure lifeline.
Now that I am debt free, I have increased this to 3 month’s living expenses. I figure that if I were to lose my job, it would probably take at least 6 weeks to find a similar job, and a further 6 week contingency to find ‘a’ job. At this time, I feel my job is secure, but if I felt that changing I would increase to 5 or 6 months expenses. Remember this is Living Expenses and not full Salary.
The important thing to remember with Emergency Funds is to keep the money separate from your current account and away from temptation. It’s also important to remember that if you need to use funds from this account; that you need to replenish them from upcoming income. Of course it goes without saying that if you can’t manage €3000, aim for €1000; if you can’t manage €1000, aim for €500.
I’ve included an image I made a long time ago when I talked about Emergency Funds – but the message remains the same.
Let me know if you have any questions on Emergency Funds!