When you start saving, the first thing you should do is accumulate an emergency fund. We talk you through the why and how.
What is an emergency fund?
If you’ve ever lived hand-to-mouth, you’ll know just how stressful it is. The constant worry that an unexpected expense will arise to completely derail your finances is ever-present. And this is the day-to-day reality for millions of people.
Figures from the Morning Consult Economic Intelligence survey revealed that the majority of Americans don’t have the financial resources to cover a surprise expense of just $400 without taking on debt. In Q1 2024, 53% of those questioned said they would have to borrow at least some of the $400 to cover the emergency.
Surprise expenses come in myriad forms: your dog could get hit by a car and need emergency surgery, if you are living abroad and a parent back home falls seriously ill you might have to fly back to care for them, your roof might spring a leak … The possibilities are, unfortunately, endless.
Even if you think you have most eventualities covered with comprehensive life, medical, home, and vehicle insurance (never be tempted to skip on any of those), there are still unexpected events that will arise that insurance simply doesn’t cover.
An emergency fund is for exactly those events. It serves as a financial safety net, providing a pot of cash to dip into that will cover any unexpected costs without leaving you with a shortfall to pay your regular outgoings. It is one of the foundations of any financial plan.
If you don’t have savings, an emergency fund will stop you from potentially spiraling into debt. If you do have savings, it will enable you to confidently invest them over the long term to maximise your return.
How much should your emergency fund be?
$400 may be enough to cover a minor emergency but it won’t touch the sides if you fall seriously ill and are unable to work for a lengthy recuperation period. Or if you lose your job and need time to find another. Or if another pandemic brings the world to a grinding halt and your income dries up. In those instances, you’ll need a lot more than $400 to avoid getting into debt.
That’s why our financial planners usually advise accumulating an emergency fund worth at least six months of your regular expenditure.
If you’ve been following our challenge, you should already have a to calculate how much your monthly expenditure is.
Where should you keep your emergency fund?
Liquidity is paramount when it comes to your emergency fund. While storing it in your current account alongside your everyday funds may be convenient, it can also lead to the temptation to spend it on non-essential items.
A more prudent approach is to keep your emergency fund in a separate savings account, ensuring it remains untouched until truly needed.
This may mean settling for a relatively low-interest rate however, the primary goal here is to maintain a financial safety net rather than maximising returns. That’s the sacrifice you make for accessibility.
We guarantee that the decision to accumulate an emergency fund is one that you will never regret. Get started today by setting up a dedicated bank account and automating payments into it each month until you reach your target.
If you need assistance with international banking, don’t forget that we can help.
Savings = security and you won’t believe how much peace of mind having enough money in the bank to tide you over for six months will bring!
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