Expect the Unexpected
The one thing you can guarantee in life is the “unexpected.”We like to convince ourselves that nothing serious will happen to us, but the unexpected happens surprisingly frequently. At some point in your life, whether it’s losing a job, your car breaking down, paying for a funeral or having to visit a sick family member in a distant location, you are going to need access to a reasonable sum of money very quickly.
Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.
Despite significant prosperity in the Western World, surveys continually show that the majority of the population live “month-to-month,” i.e. they have almost no savings available to cover their expenses in the event of a change in their circumstances. Zero emergency fund.
Furthermore, when these unexpected events occur, the most common source of funding becomes the credit card. This means that most people depend on debt to meet their expenses in the event of an emergency. In fact, research in the United States shows that the three most common reasons for outstanding debts on credit cards are unexpected job loss, unexpected medical expenses and student expenses. Funding all three of these events by credit card is completely avoidable by saving for the proverbial rainy day.
Put an emergency fund in place. An emergency fund is simply a bank account or similar which can be accessed within 24-48 hours to meet living expenses as they arise.
The amount you should set aside is a point of contention amongst financial planners. However, I suggest you have cash to the value of at least six months of everyday living expenses. This should ensure that the impact to your lifestyle is minimised in the case of an unexpected event taking place.
- It must be liquid –Liquidity simply means how quickly you can turn an asset into cash. So ensure your emergency fund is highly liquid, ideally just a simple bank account, or a term deposit, which you can access in no more than 48 hours. If you can’t get at it within 48 hours then it is not going to help in an emergency!
- It must have enough cash –While there is no perfect figure, a good rule of thumb is around six months living expenses. In many countries today, the time it takes to get a job is increasing. In the United States, it is longer than six months. As it says in Ecclesiastes, you do not know what disaster may befall your land.
- It must be set aside –The money must be liquid, but it must also be set aside so you don’t feel tempted to spend it. The money should be separate from your everyday spending account.
For some people, the idea of building up an account with six month’s expenses may seem daunting as it might take more than some time to accumulate the funds. To deal with this potential frustration, my general recommendation is to save at least 10% of your disposable income towards long-term goals. Initially, you should use the 10% to build your emergency fund and when it has hit the six month mark, devote your savings to long-term investments.
As little as $1,000 set aside for an emergency can minimise the use of credit card debt or borrowing from others.