An Emergency Fund is Necessary

This topic is especially relevant to English teachers abroad who seem to be some of the worst offenders when it comes to not having an emergency fund and then when something bad happens, they post all over Facebook asking for donations But, an emergency fund is necessary! I don’t want to be all judgey because some of these people are totally legit; I’ve actually donated a good amount of money to them over the years. But, for every legit person, there seems to be someone who is totally ridiculous and disorganized. For example, getting pregnant but then not being able to afford the delivery fees (less than $1000 perhaps?) or they want to bring their pet home to Canada but didn’t realize it would cost more than $200, or they break their leg and need donations to cover the few days they spent in the hospital (less than $5000 maybe?)

And, please take what I say with a wee grain of salt because I myself didn’t actually pull it together with regards to an emergency fund until a couple years ago. While it wasn’t unusual for me to have upwards of $5000 in my bank account at any given time, it wasn’t set aside in a dedicated, never touch it kind of way.

Anyway, disclaimer aside, I’m going to talk about emergency funds-why they’re necessary, how much you should have in it and where to keep it. Tomorrow: insurance!

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Why Everyone Needs an Emergency Fund

Bad stuff happens no matter how much you plan or organize your life to avoid it. You get cancer. Your spouse loses their job. Your kid gets hit by a car. Your cat needs emergency surgery. Your car engine explodes. You need a root canal. It’s unavoidable and that’s why you need an emergency fund.

How Much Money Do you Need?

This amount is different for everyone, but I would recommend around 6 months of living expenses. I’ll give a few examples to illustrate why you might want more or less than that.

Example 1: You are married, but have no kids. You’ve paid off all your consumer debt and just have another year or two on your mortgage. Both of you are working in completely unrelated industries and it’s very unlikely that you’d both lose your jobs at the same time. In this case, around 3 months would be fine since if one person lost their job, it wouldn’t be such a stretch for the other person to support the household for a few months, especially if you went frugal and radically cut your monthly expenses, if necessary.

Example 2: You are single and do contract or freelance work. While you have no debt, you’ve only just started saving for the future and have very little in the way of investments. For this person, I would recommend more than 6 months, since a period of unemployment is a distinct possibility, but this person doesn’t really have a cushion or something to fall back on, as they would if they had significant investments.

Example 3: Similarly to example 2, you are single and do contract work, but unlike the previous example, you have significant investments of more than $200 000. In this case, I would recommend around 4 months, or even less since if something bad happens, you will be able to cash in some investments and deal with it.

Example 4: A married couple gets pregnant and finds out that they’re having twins. Unfortunately, they don’t have adequate health insurance. I would recommend perhaps a year of living expenses to cover any unforeseen medical emergency for the mom or the kids.

Where to Keep Your Money

The answer is easy: somewhere where you can get it quickly, within an hour or two if necessary. In a mutual fund, or ETF is not the answer. A high interest savings account is probably your best bet.

5 Comments

  1. I totally agree. I am a single, independent consultant and have an emergency fund of 6 months, which I am using. I had hoped to save 8 months but alas things didn’t pan out. I am also paying off $155K of debt, down to $101K at the moment. Hoping to be able to pay off $30K again this year. Have been blogging about it for a few months now at http://debtsquasher.com. Now just beginning to explore the idea of passive income. Will be following this blog.

  2. Pingback: Is Insurance Necessary? | Freedom Through Passive Income

  3. Very nice post. I am a huge believer in the necessity of an emergency savings fund. When it boils down to it, an emergency fund is one of the foundations of financial stability. Without an emergency fund, you are forced to turn to friends, family, or more commonly, credit.

    When you look at it, you can’t afford not to have an emergency fund. Start small and build it over time.

    • You can’t afford not to have an emergency fund: Yes! I try to convince people of this any chance I get, but people seem reluctant to for some reason that I can’t quite understand. It really is a necessity unless you have a lot of other sources of wealth built up and no debt.

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