Even if you are highly organised, an unexpected curveball can still come your way, and this can often be extremely costly. That is why it’s always recommended to have an emergency fund in place: your safety net in case you are hit by circumstances you couldn’t possibly have predicted.
Unforeseen emergencies are inevitable
Even if you are meticulous with your finances, there are unexpected expenses at some point. For instance, an expensive home appliance might break down and need replacing, or your home could suffer significant damage that has to be repaired. If that happens, the last thing you want is to empty your current account, be forced to dip into savings or get into debt to cover such costs.
Stay afloat if you lose your income
Countless circumstances could lead to you losing your job or having your income temporarily interrupted. Perhaps your employer is downsizing or changing its business plan. Or maybe the industry you work in is facing the brunt of an economic downturn, and your employer can not afford to keep you on. If you have an emergency fund in place, you will be in a stronger position to make ends meet during the – hopefully brief – period that you have a reduced income and are looking for a new job.
Peace of mind
Money is one of the biggest causes of stress and anxiety, and you don’t want to compound the disruption and trauma of an unexpected emergency by worrying about making ends meet. With an emergency fund in place, you will feel a greater sense of security and preparedness, and be ready to face whatever difficulties life throws at you. That, in turn, can help you make better decisions and find the right solutions to a problem.
Freedom to take considered risks
Many financial decisions could be termed risky, such as changing your career or starting your own business. An emergency fund can act as a financial cushion during these times of great change and upheaval, and simply knowing it is there could give you the confidence to make big changes in your life.
How much money should I have in an emergency fund?
The amount you should put aside for a rainy day will depend on your specific circumstances. But, generally speaking, we would recommend that an emergency fund should contain a sum comparable to three to six months’ worth of your living expenses. It should be easily accessible, so you know where it is and that you can use it if or when that day arises.
As financial planners, our aim is to put our clients on a firm financial footing so they can plan for the future with confidence. Having an emergency fund in place is one way to do this, so it should form part of your overall financial strategy. If you have any questions about being financially prepared for emergencies, please get in touch and we would be happy to speak with you.
