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One needs an emergency fund after all!

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In blogging, there are posts that we all sooner or later write. In personal finance blogging I reckon two posts that serve like a ‘rite of passage’ are ‘the latte/coffee post’ and the ’emergency fund’ one.

If you have read The Money Principle for any length of time you, my dear reader, know how I feel about received wisdom and mindless mantras: after all this is the blog where people are encouraged to think, question and find their own way. I did write a coffee post for another blog, true. But it was to tell people that they should give up their frappuccino because it is bad coffee, not because this will have any effect boycotting tax evading Starbucks.

As to emergency funds I have repeatedly mentioned that when we were paying off our debt it was THE emergency; and that now we have sufficiently high positive cash flow for small matters and savings can be accessed in dire straits. Tonight I changed my mind on the whole ’emergency fund’ thing. What happened?

I heard the story of a family who had nothing put aside (well, they moved recently after all). They went for a routine health check and it turned out that the bread-winner has a serious heart problem coupled with weight related issues. Unfortunately he drives for living and he won’t be able to do this for some time.

This got me thinking and as a consequence I changed my mind: one needs an emergency fund after all. But I still maintain that how large this is and how necessary it is to build it depends on individual circumstances.

When it is a matter of urgency to build an emergency fund? These are the three conditions under which saving and maintaining an emergency fund is an absolute necessity.

You are self employed

…or your job doesn’t come with benefits. Many will argue that having an emergency fund come handy if one loses their job. This, however, depends on your employer and the social security system in your country of residence. Many employers provide redundancy packages and although these are not always generous they are sufficient in the first instance.

It is much more important to have an emergency fund if you are self employed – business can vary from week to week and month to month. What is even worse you may need medical attention. When one is self-employed one either works, or they don’t get paid!

Message: If you are self employed and you don’t have an emergency fund start one; now! Sh*t happens and you have to be prepared.

You are the sole bread-winner

This is fairly self explanatory. The whole point of an emergency fund is to ‘hedge’ against loss of income or increase in spending. Having more than one income in a household partly does the job.

But when there is only one income coming in there is nothing to fall back on.

Message: If your household has only one income start an emergency fund! What are you waiting for?

You have no reliable support network

We all have to rely on our support networks from time to time – these give us courage and material support. Usually the members of your support network are close relatives and dedicated friends. John and I, for example, do act as an emergency fund to our grown up sons often (well, less often after we explained that the best thing we could do for them is to make sure they don’t have to look after us when we are old – we are very high maintenance).

If you moved recently, however, it is likely that your support networks are far away and there isn’t anybody around you could rely on in grave emergency; like being taken in hospital and your family is without your income.

Message: If you recently moved or don’t have strong support networks for some other reason, you can be in great trouble if you don’t have an emergency fund.

If you fall in one of these three categories, please do something about ensuring that you can survive for at least couple of months if trouble strikes. If you fall under more than one category – hurry; you may be in a really risky situation.

It is another matter how large this emergency fund should be and/or how you maintain it. This are matters for a different conversation.

Do you have an emergency fund and how large is it?

photo credit: Harshad Sharma via photopin cc

30 thoughts on “One needs an emergency fund after all!”

  1. I have a series of emergency funds, although it is not called that. I have savings, a line of credit, cash flow and a brokerage account. In more than 40 years as an adult, I never had to go into savings for more than a temporary occasion. You can call it good planning or very few emergencies.

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  2. I think everyone needs an emergency fund of some kind. Like you said, sh*t happens. The three types of people you mentioned should probably save more than most others, but I can’t imagine a situation where having some cash set aside for the unseen would be a bad thing!

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    • @FMITH: This is correct and people in the three groups I mentioned do need to save. There is one condition, I believe, under which people don’t need a ‘dedicated’ emergency fund – when they have sufficiently large positive cash flow to cover emergencies one can deal with.

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  3. £6000 – and I sweated over ever single penny!!! But not as much as I did when the SHTF and a real life emergency occurred.

    I am a Self employed Single Mum …. so I simply can’t afford to not have an emergency fund.

    The day the find was fully filled felt like another Debt Free day for me it was so significant ……… and I sleep so much better now.

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  4. Thanks for a thought-provoking article. Our sewer line went out several years ago, and I was handed a bill for $7500 USD to replace the line. I ended up charging the total amount on my Visa and it took more than three years to pay it off. Ever since, I’ve been working on building up an emergency fund! 😐

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    • @HSL: Not good! At the same time, were you to have access to 0% interest credit it may be that money is better in investments. Too many ifs for my liking…

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  5. I have a few “emergency funds”- the main one is £1000, and for exploding household appliances, and things falling apart suddenly, I have a car fund, a new furniture fund, a retirement fund, a “things I’d like to buy” fund, ok not all emergencies but the whole thing about organising your finances like this is it focusses the mind on what you need rather than want, and has helped me prioritise spending much better.

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    • @Rosalyn: Glad this works for you; there are different approaches to this but generally the rules is: the money has to be there or coming in! I rememeber three years ago our dishwasher, washing machine and fridge freezer all gave up the goast at the same time – wasn’t nice but although we were in debt we had an ’emergency fund’.

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  6. I think in emergency fund is definitely important in many purposes, including the example of the truck driver you gave above. But that situation calls for more than just an emergency fund, namely good disability and life insurance policies. An emergency fund is useful but it likely won’t be enough to carry you through an extended disability or to provide for your family in the case of death. Good insurance will be able to handle both.

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    • that’s really important I agree,I don’t have enough in savings to replace my salary if I was off sick for a long time, so I have income protection cover to make sure my bills are paid. Very good comment.

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    • @Matt: You are right Matt; I am not sure where they stand on the insurance front but hope they do have some. At the same time, there are cases where the insurance becomes prohibitively expensive – like when someone is 200 kg and you would expect they have a heart problem.

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    • @SaburbanFinance: An important consideration :); peace of mind is what underpins some of my financial decisions as well and makes me fairly conservative. And being conservative is not that bad in crisis.

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  7. Very thought provoking article! We run our own business and definitely have an EF for a variety of reasons linked back to that. We’re growing ours as we have only been both running it for the last year. We currently have 4 months of expenses in one EF and 6 months of mortgage payments in another. We’re planning on building it to 6-9 months and 12 months respectively. It’s a chunk of money, but well worth it to cover risk.

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    • @JohnS: Well done, John; and very important when all income is from own company. We managed to pull out only because I bring in a serious salary.

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  8. I don’t have an EF, I have a bit of cash but as soon as it gets too big I invest in something. For an emergency I have credit cards and overdraft facilities that I could use. Haven’t needed them so far, fingers crossed and in the meanwhile the money has been working hard.

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    • @Pauline: Ha, ha, Pauline, great minds case. We do the same – I call it ‘the dam approach to money management’. We keep an account where we put all money above what we spend every month (surplus from regular income and side hustle) and this is kept at a certain level. All above goes to savings and investments.

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  9. I disagree with the people who assert that you must, must, must have 3-6 months of regular living expenses in cash because, quite simply, we wouldn’t live “like normal” if there was an emergency. But, yes, some cushion to keep you away from disaster is really needed!

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