4 - Emergency Fund: Your Best Friend
It’s been a while, how was your year? I finally moved out of my parents house as the world opened up and began living life again. Clearly I lost the motivation to write once I was back to going out and having fun. Now its the beginning of 2022 and I’m only writing the 4th blog, which is a bit pitiful and an L on my part. This “keeping myself accountable” needs to step its game up XD Anyway we are back with another important fundamentals post. Lets get it…
Proper Prepared
In the last post I talked about the importance of goal setting, because before you do anything else you need to understand what you are doing and why you are doing it. Now this can be hard af and take a while, to start lets break them down into short, mid and long goals so you have a good mix of cool fun stuff now and important adult stuff further in the future. What those goals are is up to you, its a very personal decision but there is one goal I did not mention and is the subject of this post: emergency funds (cue air horns).
When it comes to your moneys you got to sprinkle a bit of preparation into your life because it reduces stress and that’s something we could all do with a lot less of. The emergency fund is just that, a practice in preparation because at some point life is going to slap you across the face and you’ll be on your ass. The emergency fund is that day 1, hold you down, riding with you till the wheels fall off, real one for life that’ll be there to get you back off the floor. It’s like a net, its there if you fall ready to catch you (just to be clear by “fund” I just mean a pot of money).
First and foremost preparation is key, don’t sleep people.
An example to help illustrate - you just lost your job, you’re living away from home and you need to be able to pay for rent, bills, food and other essentials like your phone. No one wants to be in this situation, but unfortunately at some point in your life you may lose your job. Enter crazy stress levels because you are trying to find a job whilst also juggling how to actually survive but then BOOM you remember you have an emergency fund for this exact situation and realise you have about 6 months’ worth of cash stored up. Your stress decreases as you realise you don’t need to worry about food or bills, you will survive and can instead take all that energy into finding a new job (which itself is a tough ordeal).
Not a rosy picture I know but money isn’t all fun situations. Before you can even start working towards your financial goals you must first secure yourself for the future in case something awful happens like the above or maybe having to find temporary accommodation because your house flooded. Low probability events with high impact. This is where the emergency fund comes in, your backstop in case you need a steady flow of cash or to cover a sudden large unforeseen expenditure.
The Breakdown
As I mentioned earlier the emergency fun should cover a minimum of 6 months living expenses (preferably up to a year) to cover the bare essentials you cannot get away from (A.K.A your fixed costs):
Rent
Bills (incl. water, gas, electric)
Food
Phone bill
Transport
Optional: wellbeing activities e.g. gym
The emergency fund should cover what you need to just survive (I’m talking down bad as a mf), that means you freeze/cut out subscriptions for things like Netflix, Amazon Prime, Spotify (thank god for Youtube), stop trips to pubs or restaurants, no takeaways, no deserts etc. These are all classed as luxuries because when it comes down to the wire, these things are just nice to haves. I added wellbeing activities such as the gym as optional, not all people will do it but for some it is vital to maintaining positive physical and mental wellbeing. Maybe some of those things I said were luxuries are crucial for your wellbeing (mentally or physically), if so budget for them in the fund. But really you gotta be ruthless and check yourself if they aren’t.
Lets take 6 months as the target (which should be the minimum!), see below how we calculate our monthly spend based on our fixed costs to figure out what your emergency fund target should be:
Rent and bills = £600
Food (groceries) = £100
Transport (e.g. train, car, bus) = £50
Phone = £20
Gym = £30
Extra buffer (always add a little buffer) = £100
Total = £900
Your monthly spend on your fixed costs is £900 and we multiply that by 6 so 900 x 6 = £5400. You’re probably thinking shiiiiiit that’s a lot of money, but chill don’t worry this doesn’t appear overnight, it’s built slowly.
Try this exercise out, it takes only 10 minutes to write it down on the back of a piece of paper and trust you’ll know most of your fixed costs off the top of your head (use the list above to get you started). Once done the next step is how to reach that goal. I know this is a big scary number but this isn’t something you need to get sorted right now, it will take time and that’s ok! Build it up slowly with each pay cheque and focus your savings on hitting that number before proceeding onto your other financial goals. Once you’ve hit the number you can stop focusing on it and effectively forget about it whilst being smug because you are financially on point. Keep it close-by in something you can easily access (e.g. easy access savings account or a cash ISA). Remember, the idea is you can access that money at the drop of a hat, don’t tie it up in stocks or something like a fixed rate savings account that slows down your ability to get to the money or outright penalises you for taking it (there are some caveats to this but when starting out this is the best way to go).
Final Words
Finally, if you have any debt (e.g. credit card debt) it’s essential you work to pay this down in conjunction with the emergency fund, even if it’s only a tenner each month.
And that wraps up this blog post. The emergency fund, a lesson in preparation. Its ridiculously simple but once you have one you can live knowing that no matter how bad the situation is you’ve got a pot of money that covers you; that is next level peace of mind which in today’s world is truly priceless.
To summarise:
An emergency fund is your backstop, the safety net that if you suddenly find yourself without income can protect you for an amount of time or allow you to pay a sudden unforeseen cost (e.g. car repair)
It really doesn’t take long to do, open notes on your phone and start quickly jotting them down and do the quick maths.
If you don’t have one its your number 1 priority, above your financial goals. Without a solid foundation you put yourself at unnecessary risk.
Must cover you for a minimum of 6 months but preferably a year (you don’t know when a pandemic will hit #bigrona)
It needs to be readily accessible, keep it somewhere you can get to it quickly e.g. easy access savings account or a cash ISA - I know its tempting to want to invest a pot this big but its for safety not growth
Thank you for reading this post, let me know what you think in the comments below if you have any thoughts on what you’ve read or reach out if you want to discuss it further, peace out!
