What is an Emergency Fund?
According to Investopedia an Emergency Fund is “a readily available source of assets to help one navigate financial dilemmas such as the loss of a job, a debilitating illness, or a major repair to your home or car. The purpose of the fund is to improve financial security by creating a safety net…”.
So, in plain English, an emergency fund is money you set aside for when something unexpected (key word unexpected) happens. Things will go wrong, that is almost guaranteed, but by having an emergency fund you are giving yourself the blessing of reducing the financial stress of it.
Christmas is not an emergency!
Now to be clear, before we go any further, an emergency is when you lose your job, a hurricane blows down your house or someone in your family gets diagnosed with a life shattering illness. An emergency is not Christmas, back to school, Communions, Maternity Leave, having a baby, getting your car serviced or getting a check-up at your dentist or doctor. Anything that you choose or can reasonably foresee or expect to happen is not an emergency.
In order to be classified as an emergency, it should be both urgent and absolutely necessary. If it’s not urgent, you can save for it. If it’s not necessary, you can do without it. So if your TV breaks or you lose your earphones, that is not an emergency.
Another really important way to think about Emergency Funds is that is it there to protect you, like insurance. You should not invest your Emergency Fund or take any risk with it. An Emergency Fund is not there to make you money.
Why do you need an Emergency Fund?
An Emergency Fund turns many (not all) emergencies in to inconveniences. A lot of emergencies that crop up can be solved with cash. For example, if your heating system breaks, you can use your Emergency Fund to resolve it.
Having an Emergency Fund gives your financial stability. Having financial stability gives you freedom and choices. If you don’t have one, building one should immediately become your priority.
How much money should you have in your Emergency Fund?
Personal Finance experts vary on this point. Most suggest having somewhere between 3-12 months expenses saved in an Emergency Fund. If you have a dual-income household and a steady pay check you might decide to go on the lower end of this scale. If you are a single parent or have irregular income, you might decide to go on the higher end of this scale.
Now it’s up to you if you want to save the minimum amount of monthly expenses that you need each month to survive. Or you can save your current monthly expenditure in order to be able to maintain your current lifestyle. That’s an entirely personal decision.
In summary, your emergency fund should be somewhere between 3-12 months of savings, at a minimum of your minimal, absolutely necessary to survive expenses.
Where should you keep your money?
It is important that in an emergency situation that you have quick access to your money. You don’t want to have to cash in any investments or give notice at your bank to access your money in an emergency. I suggest keeping it in a very standard, basic deposit account. Under no circumstances should you keep it in your current account.
How do I save for an Emergency Fund?
Remember that you will likely need to save thousands of euro for your Emergency Fund so you are not going to build it over night. Slow and steady wins the race!
That being said building your emergency savings should absolutely be a priority for you. There are a number of ways you can build it.
- Try adding some additional revenue by taking a second job or creating a side hustle.
- Radically cut down your spending until you have reached your target savings.
- Aggressively save all and any ‘spare’ cash including any windfalls you receive.
- Set goals and milestones for yourself along the way to help keep you motivated.
- Treat this savings as a mandatory budget item, like a bill.
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