Why You Need An Emergency Fund

Life happens. It never stops.

Despite your best laid plans and attempts to control the chaos, the only thing you can be absolutely certain about is that unexpected things will happen.

When it’s things we like we call them good fortune, serendipitous events, surprises, gifts…

When it’s things we don’t like we call them setbacks, disasters, emergencies.

The truth is, whatever we call them, good or bad, it’s the things we didn’t anticipate and didn’t plan for. 

Life happens.

The more important truth is that just because we can’t predict when these “life happenings” will occur doesn’t mean we are doomed, when they happen, to be thrown off kilter – or worse, sent into a downward financial spiral.

One of the ways to cushion the impact and give ourselves financial resilience is with an Emergency Fund. 

Your Emergency Fund – what it is, why you need it, where to keep it, and what it serves in your life – that is what this video is all about, watch it now.

Here's a terrifying statistic. 

In the developed world, it's estimated that 63% of households cannot come up with the equivalent of US$1,000 (£800, €800m, R10,000) in the event of a real emergency. 

How scary is that? 

When a “to-be-expected, unexpected” life event happens, these people have to either sell something or go into debt in order to cover the associated cost. 

That is not freedom. That is not a way to be living. That is walking life on a knife edge.

This is why so many people end up in devastating financial situations.

To put it another way… 

SH*T HAPPENS
expect it and prepare for it

That's what your emergency fund is all about. 

Your emergency fund is there to catch you. 

It's quite literally there to give you ready liquidity, in the form of cash, so that when an emergency happens – something where you absolutely have to come up with money to deal with it – you have the money! 

You don't sell your investments. 

You don't go into debt. 

You go to your emergency fund.

The first key characteristic of your emergency fund is that it’s cash. 

It's not credit on your credit card. 

It's not money sitting on your mortgage that you can access. 

It's not Aunty Mabel that you could coerce into lending you some money. 

Your emergency fund is kept in “cash” so that you can access it immediately. It could be sitting in a bank account, but some people will keep it in actual folding money stashed away somewhere safe.

Your emergency fund is the
most important first line of defense
for the protection of your financial wellbeing.

You must put your emergency fund in place before you pay off debt. Before you start saving. Before you start investing.

This is vital, because the presence of an emergency fund in your life will prevent you from doing some really disastrous things to your finances. 

Your Emergency Fund keeps you away from the financial cliff edge, and gives you a buffer.

You want your Emergency Fund to be around $1,000 (£800, €1,000, R10,000).

It must be held in a different bank account from your day-to-day transactional account. If it's sitting in your day-to-day banking account, you're going to spend it – because, yes, as sure as nuts, you're going to have a shoe “emergency,” or an ice-cream emergency, or a must spoil the kids (dog, goldfish, partner, whatever) kind of emergency...

These aren't the “emergencies” we're talking about. Your Emergency Fund is for real emergencies.

The point of an emergency fund is to prevent you going into debt when the unexpected happens.  

But what if sh*t happens before you’ve established the emergency fund? 

Then we use…

the frozen card backstop

While you are building up your emergency fund we still want you covered… and using a credit card is better than using your assets – but only while you’re building up the cash you need for the emergency fund.

The frozen card backstop is a credit card you put to one side in case of emergency.

You must not carry this card around with you. 

No… this low-fee credit card is one you put in a tin of water in your freezer. 

The frozen card means you have to melt the ice before you can use it. That gives you time to determine if you’re facing a real emergency. (And the tin means you can’t rush the thawing process by putting it in the microwave.)

A vital component of financial wellbeing is financial safety. 

You can only thrive in life at the speed of safety.

The first stage of creating your financial wellbeing is providing a catch net, a safety net, so you are able to do more and experience more of life while feeling safe.

This is so you're not waking up at three in the morning wondering if you or your family is going to be okay financially.

Your emergency fund is the first layer of your safety net. The next step is to build it up to provide a cash safety net equivalent to at least three months of your basic living costs – and possibly up to nine months.

To determine what your basic needs cost, you have to know what your lifestyle costs. You need to know what your expenses are. 

If you don't yet track your expenses and have your income statement to know how money is flowing through your life, get yourself a copy of The Wealth Chef Book, together with the resources that are included, and make it happen.

When you know what your lifestyle costs you, your basic living needs are the expenses that relate to your survival. 

Basic living needs do not include luxuries, entertainment, clothing, holidays or the kids' activities. Basic needs are food, shelter, security, and access to earn. 

Once you understand the monthly costs of your basic living needs you can determine how many months you want your cash safety net to cover.

I say the target is between three and nine months because whether it’s three or six or nine depends on your safety-net requirements and the support you need to feel safe. You can do a gut check-in. 

Ask yourself… if I knew I had my basic living needs covered…

• For three months – would I feel safe?
• For six months – would that make me feel safe?
• Or does it need to be covered for nine months to stop the worrying?

The point of your cash safety net (and time frame) is this –

If your current, active income dries up unexpectedly, you must be able to survive until you can find another form of income without robbing your assets.

You decide whether it's three, six or nine months – and if you're in a relationship, you will want to discuss this with your partner and agree on a number of months that makes you both feel safe.

The person who needs the biggest safety net wins. 

The reason I say the partner who needs the biggest safety net wins is because if you're in a relationship and one of you is feeling stressed around money and is not feeling safe about their financial wellbeing, they're not going to be able to move to the next stage of financial expansion – which is about really understanding power, expression and creativity of getting money to fuel these aspects of living a juicy fully expressed life.

When you're in survival, when you're anxious, when you're stressed, when you're worried, you go into contraction – and you can't make empowered financial decisions. You can't make good investing choices. Instead you’ll go into just hoarding and protection and risk aversion. 

Now perhaps you’re thinking, “Ann, I know I can always find a way – I only need one month's cash safety net. In fact, I don't need a cash safety net at all, because I believe the universe will provide.” 

You might believe in the universe’s benevolence – that's fantastic, we all have to have faith, but here's the thing...

❝ I believe in an abundant supportive universe.. and
that it’s our responsibility to orchestrate our own rescue ❞

We have to participate in our own rescue. It is our responsibility to put in place mechanisms that catch us. 

So be careful if you're going too gung-ho on the financial edge. 

Equally, you don't want a cash safety net that’s too big either.

Be like Goldilocks – not too thin, not too fat, just right for you.

➤ A BONUS wealth tip for you

While you're building up your cash safety net you can use income protection insurances to help you cover the cash safety net gap. 

Let’s say you have saved one month of basic living needs – you could get income protection insurance to kick in after one month and cover you for the rest of the nine months. The longer you set for the insurance to kick in, the lower the premiums are, so if you set the policy to only kick in after two or three months the amount you pay will be significantly lower than if it kicks in after one week.

This is how you can combine cash and insurance policies to form your safety net.

So there you have it, your emergency fund and cash safety net. 

Continue the conversation on our Facebook Community Page (it’s free to join) and see what others are saying. I’d love to know…

• How big does your cash safety net need to be? Are you a 3-monther? A 6-monther? or 9-monther?
• If you don’t yet have an emergency fund, what are you going to do to get it in place really fast? 

Thanks as always for reading, watching and sharing so generously – and for choosing to master this key ingredient – money – in order to live your juiciest life.

Remember, your freedom is created just one step at a time – and that's all you need to do. Keep taking that one step.

With huge love

Ann