With the COVID-19 pandemic taking over the whole world under its gruesome wings, many people lost their jobs. The entire travel industry came to a screeching halt and now, in 2021, things are still not looking so good. Even in other industries, many people’s hours were cut as the economies slowed down. And all of these factors made everyone realize the importance of having a safety net or an emergency fund to fall back to. Despite COVID or any other potential world-ending threat, an emergency fund is a must-have because we are all surrounded by nothing but uncertainty.

What is an Emergency Fund?

An emergency fund is essentially a safety net when thinks go bad, in an unexpected turn of events, a sudden expense rises, and so on. So, it is some money kept aside to help maintain your sanity and reduce financial stress when any of the above things happen. And the above things do happen!

Some real-life examples of emergencies are;

• Sudden medical expense (eg: dental, accidents, chronic illnesses, etc)
• Job loss (could happen to anyone at any time)
• Vehicle repairs (a very common emergency)
• Household repairs
• Death of a family member (funeral expenses, and if it’s your partner, a certain adjustment to the dropped income).

What separates an Emergency Fund from your Savings account in the bank?

Nothing separates your normal savings or chequing account from an emergency fund, except maybe for the intent. However, in an emergency fund, there is a minimum balance you have to maintain for it to be any help during financial stresses. So, if you have good discipline to maintain a minimum balance in your savings account, that can very well be an emergency fund.

However, your investments in the stock market, gold, or bonds, cannot be counted towards an emergency fund. First of all, the investments serve a different purpose. Secondly, the investments are less liquid (ability to turn into cash without losing time or value) than a bank account.

Where to have the Emergency Fund?

So, the question becomes where to actually have your emergency fund. It matters less where you hold it as long as you can cash it out very fast. ‘Very fast’ depends on the nature of the emergency at hand, and usually, a good yardstick is one week. In this sense, a bank account makes the most sense. Liquidating your investments might mean you might have to incur losses if market prices have gone down. The same logic applies to other investments. You can have your emergency fund in the form of fixed deposits, too. However, you will lose the benefits of these types of investments when you make an early withdrawal.

According to personal finance guru, Dave Ramsey “the best option is a simple checking account or money market account that comes with a debit card or check-writing privileges.”

And we can stand by this statement. A savings account or a checking account is the best way to go about building your emergency fund. However, these options do come with some drawbacks such as earning a very low-interest rate compared to other investment types. One can argue that the purpose of an emergency fund is not to earn an income on it. However, the two options are not necessarily mutually exclusive.

One option to partially counter this issue is to fish around for a high-interest savings account. Some high-interest savings accounts can offer up to 2-3% annual interest.

How much to have in your Emergency Fund?

This is the most frequent question among many when it comes to creating an emergency fund. The answer depends on on individual’s situation largely. So, we will help you decide your personal emergency fund amount.

If you are a perfectly healthy single individual and in stable employment, you can relax a bit. But by relaxing we mean, your emergency fund should be sufficient to survive at least three months. This is a rough estimate of how long you have to survive until you get back on your feet in case you lose your main income source. So, you might want to estimate your monthly average expenditure and three times of that should be your emergency fund. The same amount should be more or less sufficient in case of a sudden medical emergency or a significant repair.

If we are to consider the situation of an individual with some medical conditions, the task becomes a bit more difficult. You will need to factor in your potential medical expenses into your emergency fund. This can vary largely depending on your medical conditions. But on average, you might want to save up to 6 months of your average expenses as your emergency fund.n

If you are married, the burden will increase further. Granted the burden also cuts in half among your partner as well. However, your average expenditure, too, would have increased significantly. So, make the budget accordingly, and consider 3 months expenditure as your emergency fund. And your partner will have your family covered for another 3 months if needed.

When should you start building your Emergency Fund?

Ideally, as soon as you leave the nest (parent’s house), you should have an emergency fund for yourself. Parents are no longer with you to support you throughout your life. Even if you don’t move out of your parent’s place, it would be ideal if you could build your emergency fund around the age of 18. By this age, practically, you would be interacting with the world around you more and will be taking on more and more responsibilities and risks in life.

How to build your Emergency Fund?

Everything builds over time. So, the earlier you start, the more comfortable you will be with creating the fund as well as managing your incomes, expenses, and investments. So, if you can spare $5 a week out of your pocket allowance at the age of 16, you’re still on the right path.

How hard you should focus to build your fund depends on how badly you would assume you would need it. Again, if you are a healthy individual with fixed employment, you can probably breathe for a little while you build your fund. If your conditions defer from these, you might want to put more energy into it. Either way, it is better to have your emergency fund as soon as possible.

Usually, we advise you to save and invest about 35% of your income. However, if you don’t have an emergency fund yet, you can divert this money into building this fund. As an adult with full-time employment, you should be able to save at least a few hundred dollars every paycheck towards your emergency fund.

However, here are some tips to scrape in some funds to build your emergency fund;

• Make a budget and see where you can cut some corners (at least until you can build your fund),
• Take up a side hustle,
• Dump your tax refund into the fund,
• Rent an additional room in your apartment/house,
• Allocate your returns on investments to the fund,
• Consider the monthly fund allocation as a bill that you have to make.

Individual circumstances vary largely from person to person. So, you should really take a day or two to evaluate your situation and options. Trust me, it will do you good in the long run.

Let us hear your experience in building your emergency fund or any questions you have with regards to this in the comments section below.