Emergency funds are like nostrils. They’re not pretty but everyone needs them.
How big your nostrils (emergency fund) needs to be is different for everyone.
I’ll drop the nose metaphors from here, no one needs to be thinking about those booger caverns.
This article is all about emergency funds and how much you should have in yours.
What is an emergency fund?
An emergency fund is simply some easily accessible money that you can use in an emergency.
They’re a simple enough concept and a fundamental of good personal finance.
Unfortunately, many people across the world don’t have access to any money to cover unexpected costs. Admittedly, for a lot of people this is simply because they’re only just about earning enough to survive. For the rest of us however, there’s no excuse.
It’s our inability to think ahead and put aside some emergency money that helped propel the payday loans industry. Modern-day loan sharks who won’t break your knees but will still charge you a crippling interest rate on small loans.
The solution to the stress and anxiety of unexpected emergencies is to have some cash on hand to cover them.
What is classed as an emergency?
Emergency is a bit of a strong turn of phrase. For most, it might be better to call it an ‘unexpected fund’. However, I think this doesn’t really reflect a sense of urgency.
In the context of a personal emergency fund, the money should be used to cover things like:
- Car breakdowns
- Essential home maintenance
- Dental or medical emergencies
- Unexpected travel expenses
When I say unexpected travel, I don’t mean a spontaneous weekend getaway to Milan. More along the lines of having to urgently visit family or friends on short-notice.
This money isn’t for treating yourself, it’s just there to cover any short-term unexpected expenses.
How much should be in your emergency fund?
Personally, I like to keep an emergency fund of around £1,000 to hand.
The figure will vary depending on your lifestyle and where you live. It needs to be enough to cover things like insurance excess payments or be able to reach pretty much anyone on short notice.
Something ridiculous like 40% of households in America can’t cover an unexpected $400 event. I imagine people in the UK and Ireland are probably in a similarly dire place.
Your fund can be as big as you like, but I think a minimum of £1,000 is a good place to start and then increased based on your specific circumstances.
‘F u money’
Many people recommend having a large emergency fund of 3-6 months living expenses.
I would treat this separate to the emergency fund and call this your ‘f u money’. This money should be used for things like losing your job during a recession, changing career paths, or taking time away from work to travel or raise a child.
Often, this money is lumped together with an emergency fund, but I think it’s a good idea to have an emergency fund strictly for unexpected costs and then ‘f u money’ for personal freedom.
Having at least 3-6 months of ‘f u money’ is a good place to start and gives you some breathing room. As you get older and save more, it’s worth building this up until you potentially have a few years worth of expenses saved up.
Doing this will give you an incredible level of financial freedom and flexibility. Obviously the end goal is to be completely financially free, but this can take a long time to do.
On our journey to financial independence it’s important that we look out for ourselves along the way.
Having an emergency fund and ‘f u money’ is a great place to start and is something you’ll be extremely grateful for when the time comes to put this money to work!