How Much Money Is Enough For Emergencies
Having an emergency fund is one of the first recommendations that you are given when you start managing your money. Why? Because an emergency can derail even the most well thought-out plan! But how much money is enough for emergencies?
Why you need an emergency fund
Investments are great (and maybe more exciting!) when it comes to creating wealth and chasing financial freedom.
But an emergency fund is just as important for financial freedom as is investments (if not even more important!).
Why?
Because life happens.
The last thing you want to do, especially early on, is to have to cash in on your investments because you desperately need the money.
Having an emergency means that you can let your money build wealth without interruption AND you still have money available to deal with whatever life hands you.
Having an emergency fund means that you don’t have to go into debt for sudden expenses (for example suddenly needing to make an insurance claim and needing money for the excess).
Emergency fund means freedom, not being reliant on others or your job. Knowing you have the cash at hand if you need it creates a peace of mind and reduces money related stress.
But how much money do you need for emergencies?
How to save money for emergencies
Emergency fund can be a challenging thing to save for (at least for me it has been!).
It’s not as exciting as saving for something fun, you are saving money that you are not meant to touch unless there is an emergency.
I have written another post with some ideas on how to save an emergency fund on low income and not touching your main income at all. Find it here.
Another way to save one (and maybe get that extra motivation) would be to utilise different mortgage structuring options.
There are revolving credit mortgages and offset mortgages which could be suitable for some.
In both cases the amount of savings you have reduces the amount of interest you have to pay on your mortgage.
The trade-off is that these savings won’t accrue any interest of their own.
I will write up a more detailed post on mortgage structures!
How much money do you need for emergencies
How much you need for emergencies depend on quite a few things and is personal to everyone.
One of the most important factors is what you are comfortable with! If a bigger emergency fund helps you sleep better at night knowing you are secure, great!
There are two main ways to approach the amount of money you need for emergencies.
Monthly expenses approach
Figuring out your expenses is the most common way to approach the size of an emergency fund.
3 to 6 months’ worth is usually recommended, some prefer up to 12 months.
This means that if you were to lose your job you’d be able to live off your emergency fund for however many months’ worth of expenses you have in there.
This of course means that you need to know what your expenses are!
If you are in a relationship some considerations should be what is your share of the expenses, whether your partner has an emergency fund and such things.
But, I am a firm believer in EVERYONE having their own personal emergency fund, relationship or no, the income earner in the relationship or the homemaker.
You need to have access to your own money that no one can take away from you.
Which brings me to the second approach.
F*** U approach
The F*** U approach is meant to describe your ability to leave ANY situation you are not happy in.
This could be your job and you being able to cover your expenses while you look for a new job (and not having to take just anything).
Or this could be your relationship and the money would cover you while you rebuild your life.
Personally I used this method as my relationship ending would be very difficult for me financially.
I estimated what I would need for a bond on a rental property, estimated 3 months worth of expenses, getting new furniture and so forth.
This way as the person with lower income I wouldn’t have to worry about how I manage as a single parent financially while still dealing with the emotional side of it all.
Personally I also have in my own figure emergency flight tickets to Finland in the case of a family emergency over there.
I want to be able to drop everything and book tickets in a moments notice if needed.
But what about insurance
There are some great insurances out there which can help you cover important things in life (the ability to earn income being one of the most important ones!).
Having an emergency fund can help you minimise what you pay in insurance premiums.
How?
Well, it allows you to set your deductibles higher, which lowers the premiums paid.
You are still covered but pay less for it. Win-win!
How much money do you need for emergencies?
