When COVID-19 hit in March last year it wreaked havoc in most peoples lives. I was living overseas at the time and had to book a last minute flight back before I got locked out of the country. Many people lost their jobs overnight with travel, hospitality, gyms and many other services being forced to shut down. Those that had cash savings were much better off in this situation as they were able to pay their bills until job seeker/keeper arrived. Those that didn’t have savings may have struggled to survive this period. So what is the biggest lesson we learned? How valuable it is to have a cash buffer, or what I like to call an emergency fund.
What is an emergency fund and why should I have one?
An emergency fund is exactly that, a fund for emergencies. COVID-19 has only highlighted that things can change in an instant and what we thought was permanent and safe can be quite the opposite. This is why its important to have a cash buffer in our lives so if things do go downhill quickly we have money we can use and we don’t have to resort to loans. Most information you read will suggest three months of living expenses, which if you don’t know how much that is for you it’s definitely worth figuring out. Some people might want six or even twelve months of expenses in their emergency fund to feel safe. The important part of an emergency fund size is that you feel comfortable with it and know that it is there if you need it.
What does three months of expenses mean?
When we are talking about expenses, we aren’t talking about three months of total income. What it means is how much would it cost you to live for three months. This includes all mortgage/rent costs, bills, food, going out, entertainment etc. The idea is that if you were to lose your job tomorrow you would be able to live the same way using this fund for three whole months, giving you plenty of time to find another income without being stressed about where your next meal will come from. For me, I like to have about three to six months of expenses saved at all times. This generally fluctuates from time to time but at a minimum I keep three months worth of expenses.
|Health related expenses||200|
|Debt repayments (CC’s, personal loans etc)||300|
If you don’t know how much you spend per month I would suggest going through your bank statements to get a rough idea of your expenses. I like to overestimate mine so I have a nice healthy emergency fund.
What isn’t classified as an emergency?
- Something that you ‘want’
What is classified as an emergency?
- Unforeseen bill
- A burst water pipe
- Medical emergency
- Car broken down
If you have to dip into your emergency fund for an emergency, don’t stress. It is there for us to use in emergencies and there shouldn’t be any guilt associated with that! If you find you are dipping into your emergency funds for ‘non-emergencies’ it might be worth setting up this fund with a different bank. You will also want to make sure it does not have a transaction card linked and you don’t have access to it on your phone through internet banking. This way, it will be more difficult to access it and spend on a shopping spree. If this still isn’t enough to keep you from spending the money, it might even be worth getting an account that requires a joint signature so you can’t get the cash out on your own.