No income, no problem: Why you must have an Emergency Fund

 

I needed an Emergency Fund, and so do you

 

 

If you read my post about why I quit my career then you would know that I am no longer working 9 to 5. I am instead focusing on achieving wellness and wealth my own way. Attempting to heal and make some dollar without being shackled by the confines of a traditional full time role.

 

And today I am going to share with you just how I am able to do that without changing my current lifestyle in any way. Without getting into debt and without relying on someone else to support me.

 

Introducing the humble EMERGENCY FUND. No income, no problem with one of these bad boys. (I mean its does run out at some point but you get the idea)

 

 

So what is an emergency fund?

 

I’m sure many of you know or can guess what an emergency fund is. But just in case, your emergency fund is a pot of money that you save up in case of emergencies, stored in an easily accessible location. (I wonder how many times I’m going to say the word emergency in this post…) Pretty simple right.

 

For example, what if tomorrow you lost your job. Would you be able to keep paying the bills and afford food? What about if you became ill and had to quit work? Or a loved one needed your help? Or *insert a billion other possible scenarios here that takes out your ability to earn money right now. Could you manage or would you end up in debt living on ramen?

 

You need to be prepared for scenarios like this to happen.

 

Anyone who is currently thinking that they don’t need an emergency fund is wrong. You can never tell what life will throw at you. And that ‘oh it won’t happen to me’ mentality is really dangerous.

 

Emergency funds are a necessary for everyone as far as I’m concerned. Rich, poor, young, old, financially savvy or not. YOU NEED AN EMERGENCY FUND. (Sorry for the caps it’s just really really really important)

 

 

Exercise:

 

Just think about your own life for a moment. If all the household income stopped what would happen?

 

Would those bills be paid, would the mortgage get paid, what about putting fuel in the car, medical expenses, food …

 

If you’re currently answering this going yep no all that’s fine. I’ve got a pot of money that would keep me safe (as much as money can) then give yourself a pat on the back. You already have an emergency fund. (Whether you realised it or not.) However, there are plenty of people out there who wouldn’t be able to pay those bills, or the mortgage or put fuel in the car or get food. In fact, I would bet that there are more people out there without an emergency fund than there are with them!

 

If instead, your thinking oh ermm well I might be able to put some of it on the credit card. STOP because from this minute onwards you are in a very dangerous situation that needs rectifying. You must put all your energy into saving up your emergency fund. (Don’t worry I will tell you how much you need to save and give you action steps on how to save your emergency fund further down the post).

 

How my Emergency Fund Saved my Life

 

Thinking that title above is a bit dramatic? It’s the truth.

 

If you read part 2 of ‘Why i Quit my Career’ you know the story. But for those who haven’t read it or don’t want to I will summarise.

 

Whilst working my full-time career my mental and physical health had deteriorated significantly. I was dealing with IBS, chronic headaches, migraines, chronic fatigue, anxiety and depression. Work was zapping all my energy and my symptoms were just getting worse and worse. It was like I could never get enough time to recover enough and I had only been there 3 weeks. (I had been working full-time before but this was the job I was meant to work years at without taking a break more than my annual leave). It always felt like I was in minus numbers with my health and that I was going further and further into the red.

 

I was at a point where I no longer wanted to live anymore. It was so bad. I just thought if I was no longer alive I wouldn’t have to deal with my health and work anymore. Thats how much of a struggle full-time work was for me.

 

Because my emergency fund was ready I was able to quit without any future plan at all. It doesn’t really bear thinking about what I may have done without that safety net. In reality my emergency fund saved my life. And since you don’t know when your own life may need saving an emergency fund is non negotiable. You need one.

 

 

Now we are all clear on the importance of an emergency fund. Let’s have a look how much should be in there and how to get one.

 

What amount should your emergency fund be?

 

There is no single number that is right for everyone. I know $/£1000 is suggested as a good emergency pot. I think this is mainly because it is recommended by Dave Ramsey as his initial baby step from his debt freedom program. (You can read more about Dave Ramsey’s seven baby steps here, he has great info for those struggling with debt, well worth a look).

 

However $/£1000 is only a starting point for a secure and realistic emergency fund. You need more than that!

 

As a general rule I would recommend at least 6 months worth of your budgeted household expenses. Now you may not need 6 months worth of expenses in an emergency. But 6 months means that if something else happens within that time frame you can handle it.

 

Say you lost your job and your fridge broke down in the same month. Now it may only take you one month to get a new job but if you had only one months worth of emergency fund you would be pretty stuffed on the fridge front. (And no you wont be buying a fridge on credit because buying on credit is not a route to wealth in any way, its only a route to worry and bills).

 

As an example I’m going to talk you through my own emergency fund. I have a year worth of emergency fund sitting nice and safe where I can easily access it. By that I mean it’s in an easy access savings account with the bank, not invested in the stock market or stuffed under a mattress, mattress stuffing is not advised.

 

I personally don’t feel comfortable unless I have a years worth of expenses. Perhaps because I always knew that if I got really ill it would take more than a few weeks to get better and just getting another job may not have been possible (how right I was). If you also suffer from ill health that could prevent a quick return to earning money, or any other scenario like that, I would recommend you aim more for a years worth of household expenses rather than 6 months.

 

The amount I need to continue living at my current lifestyle (my household budgeted expense) is £800 per month (that’s about $990 for my American friends across the pond). My lifestyle is quite modest but it does allow me to have fun and enjoy life. That means for a years worth of emergency fund I need £9,600 ($11,800). I actually have £10,000 saved up which means for a year and half a month I’m going to be okay.

 

However, it must be remembered that if I need to shell out on something major, say my car breaks, then I obviously have less ‘okay time’. So if car repairs cost £1,500, I would only have £8,500 left in my emergency fund which is around 10 and a half months worth of emergency fund.

 

Woah I just calculated how much my own emergency fund needs to be and help, thats a lot of money!

 

Calm down, its okay, you now know that you need an emergency fund and I’m going to provide you with an action plan below to help to reach that number. Trust me it won’t be so bad!

 

Just quickly before we move on:

 

Going back to Dave Ramsey, in his program he suggests holding only an emergency fund of $/£1000 until any and all debts (apart from your mortgage) are paid off. Honestly I think this could be very dangerous, its just not enough.

 

You could easily get an unexpected bill for $/£1000 . Car repair, home maintenance, medical bill, these are just a few examples of things you may have to pay unexpectedly that are often above that not so magic 1000 number. And if your already struggling with debt and money is tight, then you received an unexpected bill, and then lost your job. Well bugger (actually I think you may say something a little stronger but I’m trying to keep things PG).

 

Thats why I think everyone needs at least 6 months of household expenses saved. Then you know what ever happens you have time to handle it without sinking further into debt. But I do understand if you just want to get those debts paid off ASAP. I will leave the choice up to you, but personally I wouldn’t want to do anything without my full emergency fund.

 

 How to save your emergency fund action plan:

 

Step One:

Work out your monthly household expenses. If you don’t know how to do this then I would recommend reading my post about budgeting which will give you all the know how for this step.

 

Step Two:

Assess your own lifestyle and decide how many months of emergency fund you need. I recommend everyone has at least 6 months. You may need more if for example you are self-employed or have a health condition that could affect your ability to earn money. If in doubt more emergency fund is always better.

 

Step Three:

Start saving! I would suggest that you split the target amount into bite sized pieces so it dosen’t feel overwhelming to save that much.

Start by saving $/£1000, then the next thousand and so on. Ideally set yourself a realistic target date for each thousand to be reached and then reward yourself when you reach it. Just don’t reward yourself by spending money!!! (Need reward ideas, think along the lines of a long soak in the bath with scented candles and your favorite bubble bath. It’s all about recognising that you have done something amazing and reached a goal.)

 

Step Four:

See where you can save even more. Skip those morning lattes until your emergency fund is full. Call up your internet company and negotiate a better deal. Try riding your bike more and save money on fuel. Go a bit money saving extreme until that fund is full. Trust me for the piece of mind will be worth it!

 

 

Ever had to rely on your emergency fund?

 

Tell me more about how your emergency fund has saved your behinds before in the comments below. Plus if you have any extra questions please feel free to email me at [email protected]