With all the demands on our bank balance, saving for future unknown emergencies can drop to the bottom of our list. The bills have increased, the kids want a puppy, your sister’s having a destination wedding and you simply must have a proper holiday this year. Why delay gratification, you could be hit by a bus tomorrow right? Well yes, and isn’t that exactly the point? You could be hit by a bus tomorrow and be unable to work, you could lose your job, the boiler could breakdown or, dare I say it, Covid…
The argument for living in the moment is also the very reason to protect your future. But this isn’t a scary story, financial emergencies are not financial emergencies if you have the money in place to fix them and taking even small steps now will inevitably put you in a better position to weather any future storms.
Unfortunately, the problem with unforeseen emergencies is that it’s impossible to know how much money you will need. All circumstances will vary, but a good rule of thumb is three to six months expenditure for a working age adult and two years income for retirees. The level of emergency fund should be reviewed regularly to account for changes in your circumstances as you progress through life.
Importantly, you want to save enough to get you through a financial emergency but not so much that your money isn’t working for you. Any savings beyond your emergency fund and upcoming ad-hoc expenditures should be invested for growth potential to make the best use of your assets.
So why not put all of your money to work and invest 100%? Markets are cyclical, and a downturn is the most likely time to need to dip into your emergency fund. Encashing investments whilst the market is in its downward trend results in crystalising lower share values without giving your assets the time to benefit from the recovery and boom phases of the market.
Additionally, you’ll need to encash more shares to provide the same level of cash in a downward trend than you would in boom years, reducing the wealth derived from recovery even further. Instead, source the best available interest rate, ideally in a tax advantaged product like a cash ISA for your emergency fund. Keep it separate from other savings or spending accounts and consider it sacred until such time that a financial emergency arises.
Not all financial emergencies are created equal. If your emergency is medical based, then it’s probably best to spend the money on getting the best treatment but if your car breaks down the emergency fund is not an opportunity to finally get that Mercedes-Benz SLS AMG Electric Drive you’ve always dreamed of!
When considering use of your financial emergency fund, consider what part of that expenditure is necessity and what is desire driven. Your emergency fund will be no good to you in a crisis if you dip into it for luxuries.
Alongside building your emergency fund there are other considerations to prepare for a financial emergency. Repaying debt can reduce much of the burden in a financial crisis as well as saving you money on those hefty interest rates. Budgeting and cancelling unused subscriptions can reduce expenditure freeing up money to fund your emergency savings. Review any old protection plans to ensure you are not paying for something you no longer need will also reduce expenditure, your EQ Financial Planner can help you with this.
It’s human nature to forget about our future self when our present self is in the throes of life, but a little sacrifice now can save you from considerable pain in the future. Money doesn’t buy happiness, but it buys security, it buys freedom, it buys comfort in the knowledge that you are prepared for life’s inevitable twists and turns. Your future self will thank you.
