You should always expect the unexpected! You can be prepared for the unexpected by having an emergency fund set aside. An emergency fund is the best defence against a financial emergency so over the next four weeks, Wednesday being Finance day, I'm going to explain the why, how, what and when of an emergency fund.
Many people doubt they can afford to start, build and maintain an emergency fund. The truth is you can't afford to not have one.
A financial emergency could be an car or home repair, urgent medical expense, job loss, death or anything else requiring a significant amount of money on short notice.
Unfortunately, these challenges force many people to deal with the situation by using credit cards or taking out a loan. This simply makes the situation even more challenging in the long-term.
How Much is Enough?
The general rule is to keep between three, preferably six months of living expenses in a readily accessible account. Of course, that's just a general rule. Twelve months of living expenses in today's economic climate is a better goal. The proper amount for you will depend on your specific situation. No two situations are identical.
Consider if children are part of the equation. How much debt are you currently carrying? What types of insurance cover do you currently have? The answers to these questions will allow you to make an informed decision about the size of your emergency fund.
Sudden loss of income is the most common reason for needing to dip into an emergency fund. If there is a job loss, bills still need to be paid. Finding significant employment can take at least a few months. Current statistics show that if you are aged over 50 it takes an average of 72 weeks to find employment - any employment, not just in your field of expertise. You don't want to be caught without an income and without money in savings!
Australians have the safety-net of unemployment benefits but believe me when I say it is not enough to cover your mortgage, your daily living expenses and your household bills.
It is always best to have a plan in place for the worst-case scenario. It's easier to handle the smaller emergencies, like having to replace a refrigerator or get the car repaired from your general savings.
But situations will arise. It's simply part of life. And some of them will cause you major financial hardship. And that's when you will appreciate the peace of mind and security of a fully funded emergency fund.
Next week: Part 2 - Being Prepared is Always More Pleasant Than Being Caught Short
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I put every cent we get on our mortgage and so the equity effectively becomes our emergency fund. This is to minimise interest charges. In fact our wages are deposited directly on it and only what we need is taken out. Credit card is cleared every week and we have no other loans. "What we need" includes weekly payments on all utilities and rates and so they are paid in advance, currently they are in credit. I have redraw facility but i am very careful not to use it unless there is an emergency. I know i am an Accountant but it takes discipline and also a commitment by both partners. I couldnt do this if hubby was out there spending. Teamwork and allowing ourselves $50 a week pocket money each has helped us enormously.
ReplyDeleteWe have been through several periods of unemployment during the last five years lasting from 5-7 months each. This has taught us to be very careful when we are both working. Yes, we are both over 50 and i agree that it is very difficult to find employment. I dont know how the Govt expects people to be looking for work in their 60's but this is something to be addressing now in our 50's by reskilling, becoming self sufficient. Unless i lose my marbles i can continue working but my hubby is a tradie and you cannot expect them to be doing the same kind of work, so we are looking at that now.