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Highlights
At times, life can be very unpredictable – a storm causes extensive damage to your home, a scenic drive into the countryside leads to two flat tyres, a skiing trip is cut short as you end up in crutches, while a meeting with your HR manager sees you being laid off. Unexpected emergencies such as these are a fact of life, however, living with the security of an emergency fund is priceless since it can help you be better prepared for these unplanned emergencies without having to take on more debt, while it can also help safeguard your other long-term investments.
The backbone of any comprehensive financial plan, if you are aware of the merits of having an emergency fund but are not quite sure how to make it happen, here is a guide about boosting that all important savings buffer.
An emergency fund is a readily available source of money that could help you navigate any financial dilemmas that you may find yourself in. As a result, it can serve as a financial safety net, preventing you from being caught off guard and from having to take out money from high-interest debt options like your credit card or undermine your future security if you end up having to tap into your retirement funds.
A sudden job loss, a medical intervention, car trouble and even major national crises that could lead to financial crises such as the COVID-19 pandemic are all events an emergency fund can help you weather.
However, it is important to bear in mind what is not an emergency. Here are some examples:
Apart from offering financial stability and preventing you from having to live on the financial edge, there are other pros to having an emergency reserve of cash. Keeping money earmarked for your emergencies out of your immediate reach makes it much more difficult to use on things like a new TV or clothing. At the same time, it can stir you away from making bad financial decisions like using other alternative ways to access cash quickly which could involve interest, fees and other penalties.
This will vary from individual to individual based on their income and lifestyle. At the same time, you must also consider how your emergency fund fits with the rest of your financial priorities. No financial plan yet? Read along why having one is important and how you should go about drafting yours.
Broadly speaking, financial planners recommend that you cover between three and six months’ worth of expenses, while you also need to ensure that these funds are highly liquid and you can access them as soon as the need arises. For instance, for a couple with expenses totaling around €5000 a month, including things like home loan payments, groceries, car payments and other necessary monthly expenses, they will need to set aside at least €15,000 for three months and as much as €30,000 for six months.
If you are just getting started with setting up your emergency fund or you are knee-deep in debt, it might be best to save a starter emergency fund of around €1000 and then once you are out of debt, beef up your monthly savings so that you can build an emergency fund that covers three months’ worth of expenses.
Starting early is key to building a comfortable cushion against unexpected mishaps that could crop up at one point or another in your life. And getting started is easier than you may have thought. Here are a few simple steps you can follow:
1. Make a budget and live by it To do so you must list all your monthly income and expenses. In this manner, you will have a clear picture of how much money you have available. But part of setting up a budget is also determining your monthly expenses. These will vary from person to person and whether you want your emergency fund to cover small luxuries or you would rather have a more bare-bones kind of a fund with just enough money for you to pay the bills.
2. Set a monthly savings goalSetting money aside for your emergency fund should be your first priority as soon as you receive your paycheck. In this manner, you will not be tempted to spend it on other, less important things. As time goes by, you might have to adjust how much money you save. For instance, you may be able to save more if you got a promotion at work.
Think you do not have what it takes to save and you are concerned that you will succumb to your spending weaknesses? Then try automating your savings by perhaps setting up an automatic transfer as soon as you get paid.
3. Slash your budgetIf the above step is proving to be harder than expected, you might want to consider reducing your expenses. For instance, consider cutting down on eating out each month, switching to a cheaper cable provider or downgrading your cell phone plan even if temporarily. Once you give it some thought, you may realise that you can do without certain things. Then, once your emergency fund reaches a healthy balance, you can start increasing your spending.
4. Make more moneyLastly, you should consider increasing your monthly income so you can grow your emergency fund. Opt to work some overtime, pick up a part-time job or start a small business in your free time. An easy way of making some money with little effort from your end is to sell things you do not need or use any longer. Here are some ways to make money while you sleep.
Alternatively, if you happen to get your hands on a windfall be it a tax refund, a bonus from work or money as a gift, make sure you save it.
When considering where to save your emergency fund, you first thought is probably a classic savings account in a typical brick-and-mortar bank. While the benefit of doing so is that you can gain easy and almost instant access to your money which is particularly important in times of need, the problem with this option is that you will earn little or no interest in today’s low-interest-rate environment and when you are not earning interest, you are losing money to inflation every single year.
Your emergency fund should ideally strike a balance between earning interest and allowing easy access to money. For this reason, you might want to consider what are known as liquid assets. A liquid asset is either available cash or an instrument that has the capacity to be easily converted to cash.
Here are some options:
Whatever your choice, make sure you can access your money quickly, easily and without any withdrawal penalties. With this in mind, put some of your emergency funds in less-liquid and higher risk options such as bonds and stocks only if you have a large emergency fund and you feel you might not need to access all the money at once.
If you think you are facing some sort of a crisis that may need funds to see you through it, take a step back and ask the following questions to ensure that this is indeed a genuine emergency.
A necessity you cannot live without, an emergency fund can offer that much-needed long-term security and can help you weather a crisis without falling into debt. At the same time, it has the power to turn major emergencies into mere inconveniences.
Explore CC’s full range of investment options that can help you stretch your monthly income so that you can add more capital to your emergency fund or visit one of our local branches for a free financial health check which includes a review of your current financial situation and a customised financial plan tailored to your needs.
Disclaimer
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly, any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views, or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views, or opinions appearing on this website.
Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act.
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