You Need an Emergency Fund Now More Than Ever
The unexpected can throw you in the deep end at any moment
It’s a mild day sometime in mid-July 2020. The COVID pandemic is in full swing and an eager 20-something IT recruiter sits at his desk to dial into his pre-scheduled Zoom call with his CEO.
His face was visibly tormented by a myriad of fear, uncertainty for his future, and whatever strips of happiness he had left were going to be pulled from him during this call. It played on his mind for hours prior, when the ringing on the screen began.
Despite a respectable performance in his role (given the circumstances), the CEO had made the decision to make him redundant. He was one of the youngest members of the team, still lived at home, and had no one financially dependent on him. It was a logical decision from a manager’s perspective.
That 20-something recruiter was me and even though it was more than 18 months ago, I remember that painful afternoon as clear as yesterday.
The problem wasn’t being made redundant, it was about how financially unprepared I was to being made redundant.
I still had the same number of outgoings: rent to pay, subscriptions, phone bills, credit card payments — but now I had no income.
Because I hadn’t been with the company for longer than 2.5 years I had no redundancy package either, I essentially lost my only revenue stream.
I’ll explain some ways I started creating passive income streams in another post, but at 21 years old I was now in economic disarray.
The lessons: no matter who you are or what you do, if your salary is your only income then you are always one step away from being broke.
More importantly, and regardless of your income — if you don’t have an emergency fund, you have not prepared for the worst.
An ‘emergency fund’ is pretty self-explanatory — it’s a lump of cash you put aside for things such as:
- Job Loss
- Medical Emergencies
- Car / Home repair emergencies
- Unexpected travel costs (i.e. to see a relative who is ill)
A lot of us are familiar with the term but few actually utilize the concept properly.
Let me explain the key benefits to have a structured emergency fund:
- Your stress levels are lower — you feel prepared for the unexpected, regardless of what form it takes
- You become more sensible with your cash flow — it’s proven that people who have emergency funds tend to develop a healthier relationship with money, respect that stops frivolous and unnecessary spending
- It stops you from borrowing — debt is often seen as an essential part of the fiat system we live in, however, the best way to remain mentally secure around money is to incur as little debt as possible
How much should be in my Emergency Fund?
This is sensibly the next question a lot of people will ask. It will vary case by case but in a nutshell, a good rule of thumb is:
Minimum 3-6 months’ worth of expenses — the exact amount however does depend on personal lifestyle factors
A great exercise is actually to audit your own bank account as if it were a business — you start to understand your spending habits and from there develop better habits with your own money.
Where should I keep my Emergency Fund?
Another great question and this is a completely personal preference. For me, separate savings account in my regular banking app suffices. (I’m UK based and use NatWest)
You usually can rename separate savings accounts within Online Banking, which can help you save for individual goals.
A few notes to finish
Usually, I would advise you to not take financial advice online (the hypocrisy of this statement is undeniable).
Emergency Funds are universal and I’m sure you will hear a lot of financially savvy people talking about them or recommending them throughout life.
I created my emergency fund 2 days after I was made redundant, I now have 6 months' worth of expenses tucked away for a rainy day and I would implore you to do something similar.
COVID-19 has opened the door to job instability, illness of our closest friends and family, and general insecurity of the future. Putting your best foot forward financially now offers you the opportunity to reclaim some of that stability.
You never know what’s around the corner, that being said I wish you all a happy, healthy, and successful 2022. Stay safe.