OK so that title was a little bit of an alarming title, but I am going to summarise something very important for you over the next few paragraphs. When someone talks about an emergency fund, what do you think of? Do you think of it as a savings account that you need when you are a grown up and have kids and a house, cars, furniture, pets etc? I often did. I thought of it as being something I would have when I had real responsibilities.
An emergency fund is something we should all have! It is not something for another day, or something for someone else. Emergency funds should be relative to your situation and should account for what unnecessary expenses could arise in your unique life.
An emergency fund doesn’t have a defined amount. Where £5,000 may be adequate for a young family to cover any unexpected bills / situations; £800 might be enough for a student backpacker traveling the world over summer – enough for that emergency flight home. £10,000 might not be enough for a family of 5 living in central London in a £1m house – that would barely cover a months outgoings!
Although slightly extreme, the point I am trying to make is as follows: You have to define how much money constitutes an emergency fund for your own situation. Don’t get bogged down by bloggers arguing if 10K is enough… this is totally irrelevant to you! Nobody can give you generic advice. The fund size is dependent on so many different variables - your mortgage cost, job security, debt, outgoings, plans, ambitions etc. The one thing that you need to realise is that you need something!
Personally, my Emergency Fund target is at around £5000. Our standard outgoings are around £2500 a month and assuming the worst case scenario that I lost my job (the higher earner), £5000 would be enough to cover the loss of income for a few months and would provide enough of a buffer to live off and travel to interviews etc. Absolute worst case scenario, we lose both our jobs at the same time (extremely unlikely) we would have enough to cover bills for 2 months.
That said, I don’t intend to put £5000 into a savings account where it would earn little interest, but rather have that sort of money easily accessible across a wide-range of low risk investments.
Another reason that I think people are put off creating an emergency fund is that they think of it sitting there frozen – doing nothing.. almost a waste! Instead, think of an emergency fund as a buffer across your portfolio.
OK, enough of the lecture – now it is time to enter the giveaway folks! $100 up for grabs:
Let’s assume that you win the $100. You will obviously put $50 in an Emergency Fund after reading this, but What would you spend the other $50 on? It has to be entirely selfish! GO
Good Luck! – You can find out more about taking part in future giveaways HERE.