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Have you saved for a rainy day?

The one thing you can guarantee in Life is the “unexpected”. We like to convince ourselves that nothing serious will happen to us, but the unexpected happen surprisingly frequently. At some point in your life, whether it’s losing a job, your car breaking down, paying for a funeral or having to visit a sick family member in a distant location, you are going to need access to a reasonable sum of money very quickly. Despite significant prosperity in the Western World, surveys continually show that the majority of the population, live “month to month”, i.e. they have almost no savings available to cover their expenses in the event of a change in their circumstances. Furthermore, when these unexpected events occur the most common source of funding becomes the credit card this means that most people depend on debt to meet their expenses in the event of an emergency. In fact, research in the United States shows that the main reason for outstanding debts on credit cards are unexpected job loss unexpected medical expenses and student expenses. Funding all three of these events by credit card is completely avoidable if you have an emergency fund.

The Solution

An Emergency Fund is simply a bank account or similar which can be accessed within 24 hours to meet living expenses as they arise. The amount you should set aside is a point of contention amongst financial planners. However, suggest you have cash to the value of at six months of everyday living expenses. This should ensure that impact to your lifestyle is minimised in the case of an unexpected event taking place.

Key Issues

It must be Liquid!–Liquidity simply means how quickly you can turn assets into cash. So ensure your emergency fund is highly liquid, ideally just a simple bank account, or a term deposit, which you can access in no more than 48 hours. If you can’ get at it within 48 hours then it is not going to help in an emergency
It must have enough cash–Whilst there is no perfect figure, a good rule of thumb is around six months living expenses. In many countries today, the time it takes to get a job is increasing. In the United States, it is longer than six months. As it says in Ecclesiastes, you do not know what disaster may befall your land(Ecclesiastes!11:2)

The money must be liquid, but it must also be set aside so you don’t feel tempted to spend it. The money should be separate from your everyday spending account.

For some people, the idea of building up an account with six month’s expenses may seem daunting as it might take more than some time to accumulate the funds. To deal with the potential frustration, my general recommendation is to save at least 10% of your disposable income towards long term goals. Initially, you should use the 10% to build your Emergency Fund and when it has hit the six month mark, devote your savings to long term investments. As little as $1,000 set aside for an emergency can minimize the use of credit card debt or borrowing from others.

Today’s Tasks

1. Assess your finances. Do you have approximately six months of living expenses set aside in an account that you could access within 24 hours or 48 hours? If the answer is no, it’s time to set up an emergency fund.

2. Set up a bank account or equivalent where you can keep your money in a safe, highly liquid (quickly convertible to cash) environment.

3. Using your surplus cash flow, which ideally you have identified by doing a budget, build up savings that are the equivalent to a minimum of six months’ living expenses (Author Alex cook)