Imagine that you’re coming back from holiday. It has been an amazing adventure that you shared with your dearest friends and you will remember it for many years to come. After a long haul flight you finally arrive on home soil, pick up your luggage and head towards the parking lot. A short 45 minute drive and you’ll be home, have a shower and get some proper sleep. One minor inconvenience: your car won’t start. WHAT?
I don’t have to force myself to imagine the above scenario as I have actually experienced it a year ago. I rectify: I will NEVER forget that holiday, the adventure continued longer than anticipated. However, apart from the inconvenience of having the car towed to the nearest garage, changing two trains, a tube and a taxi to get home, I wasn’t drowning in sorrow. Why? I had a life vest – my emergency fund. Within two weeks I had bought another car and paid for it in cash. Well…not literally, but I did not use a credit card or a loan. And no, it’s not a 20 year old bright yellow toad that my friend wanted to get rid of and therefore sold it to me for $200. It’s a proper car.
Building an emergency fund is a gift for your future self: the gift of sanity amidst unforeseen and possibly stressful circumstances which you cannot control.
Examples include losing your job or becoming incapacitated to work, having to pay for expensive medical treatment, replacing your boiler and any other major expenses which you did not anticipate.
How big or small your emergency fund should be depends on your circumstances and tolerance to uncertainty. A common approach is to build a fund that would cover your non-negotiable expenses (food, rent, utilities and transport) for 3-6 months. I will let you answer the question of how much you need and I will focus on 5 ways you can get to that figure.
1. Start now. Don’t wait for the perfect time to start, it will never come. Every month there will be something (else) going on: your friend’s birthday, cousin Mark’s wedding, summer sales, Black Friday, etc. The best time to start is now. Don’t delay, emergencies don’t offer extended payment terms.
2. Be consistent. Commit to a minimum amount that you will contribute towards your emergency fund every month, no matter what. Then set a direct debit for that amount to leave your current account as soon as you get paid. Don’t trust yourself to (remember to) do it. You won’t. Life will get in the way. Trust the system, it works.
3. Get creative. There are many ways in which you can speed up the process of building your emergency fund. Some examples include:
- Selling unwanted things online
- Preparing home cooked lunches a few days a week
- Offering a spare room for rent on a temporary basis
- Using supermarket vouchers for grocery shopping
- Negotiating better rates for utilities/mobile phone/broadband or changing suppliers
All of the above have the potential to produce or release some money which you can use to increase the balance of your emergency fund.
4. Seize every opportunity. Any occasion can turn into an opportunity to grow your fund. Ask for money instead of gifts for your birthday, Christmas, anniversary, etc. If asked what you will buy with the money you could answer ‘peace of mind’. I doubt that anyone would refuse you such a gift. Of course you can always explain to your friends and family what you’re using the money for and bring them on board to support and encourage you.
Similarly, if you receive any bonuses at work or unexpected sums of money, you know what to do. Promotions fall into this category as well. Work out the extra net amount you will be earning every month and set a direct debit for that sum to go straight to your emergency fund on the same day you get paid.
5. Top it up. Needless to say that if you have used part of your fund you will need to replenish it by following steps 1-4 above. Don’t forget inflation which eats away at our money – if you are keeping your emergency fund in a cash account, throw the occasional $10 in there just to allow for the time value of money.
Bonus: a word of caution. Please get very clear on what an emergency is. Don’t go through the effort of gathering what could potentially add up to a few thousand pounds in order to spend it all during a panic attack on December the 23rd.
Christmas is not an emergency. It happens every year, on the same day, without fail. Which means that you can plan for it.
I wish you best of luck with building your emergency fund. You can do this, I trust you! Best of luck and stay sane!
Originally published at www.linkedin.com