Why you need to have an Emergency Fund

Photo by Fabian Blank on Unsplash

I screwed up!

I’ve got a confession to make. I made a stupid mistake when it comes to personal finances. I started investing my money before doing of the most important things when it come to personal finance. Investing is great and I’m already starting to see some returns but damn! I didn’t save up an emergency fund. It’s the first thing you learn about personal finance and as much as I preach it to other people, I’m guilty of not practising what I preach.

Of course the universe has a way of showing us the error of our bad decisions and over the course of the next month I’m going to be in and out of the dentist. (Apparently grinding my teeth which I sleep is not a normal thing to be doing.) This whole affair is going to cost me roughly $700 by the time I’ve paid for the appointments and the mouth guard. That’s $700 I don’t really have which is why it’s so important to have an emergency fund saved up. Luckily the dentists in Australia mostly have payment plans so I’ll be able to pay these bills off in instalments without it doing too much damage to my cash flow.

What is an Emergency fund?

An emergency fund is sort of like a self managed insurance. It’s a stash of money that you keep aside in the event of an emergency which could be anything from dental work, car accident or even unemployment. Did you know that 4/10 Americans wouldn’t be able to access $400 in the event of an emergency without selling off assets or going into debt? That’a nearly 130 million people or more than 5 times the population of Australia.

If you could save up $400 for the event of an emergency then you would already be doing so much more than nearly half the population of America. Remember my case though. Looking at $700+. That $700+ is for minor dental work too. Imagine if I needed some major work priced in the thousands! *Shivers*

Looking at your budget, try to figure out where you could set aside some money each week to put towards and emergency fund. If you can put $21 aside each week for an emergency fund then in a year you’ll have $1k which trust me, would make a huge difference in the event of an emergency.

How much money should be in an Emergency Fund?

The amount varies depending on a few different variables from whether you have private insurgence, mortgages and other expenses. Most experts say that you should have from 3-6 months of living expenses saved up. This doesn’t include things like going out for dinner or the bar on Friday nights. These things are your loans, your bills, food and fuel etc. It seams like a huge amount to save up and it can also look pretty overwhelming to someone who is just starting which is why I choose to have goals to work towards so that the process is a little less tedious. Considering i’m about to start saving for my emergency fund, I’ll show you what my plan is.

First Goal: $400. When I reach that goal I know that I am in a better position than a lot of other people which serves as some peace of mind. Things could be worse

Second Goal: $1000. It’s a pretty number. Pushing past that $1000 will feel like an achievement.

Third Goal: $3000. There it is. That’s one month of income right there. I know that if anything happens, I’m all good for a month.

Fourth Goal: $9000. There it is. There is my three month of emergency funds saved up. I’ve done good. Now lets do it one more time to be sure.

Fifth Goal: $13,500. I’m half way there. Just another $4.5K and I’ve got it.

Sixth Goal: $18,000. There we have it. I’ve got six months of income saved up. If I’m eve in an Emergency then I know that I have enough money for the next six months to get things back on track.

After reaching your goals, you can then start directing that money elsewhere. Personally, I’d still continue throwing something like $21 a week into the Emergency fund just so it was still growing but any extra money that I was investing into the Emergency fund would be diverted to investments elsewhere.

Some final thoughts

I have to apologise for all this time I was preaching personal finance and I’d ignored one of the most important pieces of personal finance advice. Save an emergency fund. It’s not a matter of if you need it, only a matter of when you need it.