If the answer is yes, then this post is probably not for you. If the answer is no, then you probably want to continue reading. If the mere thought of losing your job (whether being sacked, made redundant, becoming ill or something else entirely) makes you a little queasy, then this is the first step on the road to being able to answer "Yes, I'll be fine."
But who is it, I can hear you cry, who can answer yes to such a question? The answer is simply those who have already thought about this question and taken steps to prepare for such an event. It is those who have foreseen that sometimes life doesn't quite go according to plan. It is those who have made plans in the recent past to help out if such an event occurs.
It's as simple as that. No fanfare, no trumpets, no ticker-tape parade, no nothing. It's not a very exciting answer I'll give you that but it is an important one. Have you ever heard of such a thing? Maybe, maybe not but you have now. Here's a quick run down of what an emergency fund is.
Essentially, it's a savings account. An account from which you can draw money relatively easily since if something were to go wrong, you'd want to be able to get your hands on such an asset as quickly as possible. It's liquid and it's close to hand. Not too close mind, otherwise you might be tempted to spend it but far enough away to be an inconvenience to get your hands on it. Certainly not something you can draw from with a plastic card of any description.
And this is where I own up. I don't actually have an emergency fund. Well, at least I didn't until last week. I opened an online savings account last week and actually started it off by putting in the minimum amount required to open it. That's the first step in the ladder to having an all-singing, all-dancing (but still tearfully dull) emergency fund. Granted, I'd never thought much about this before but as part of my recent monetary review I decided that this kind of fund was something of utmost importance.
As always with saving, the hardest part is actually starting off. Once you've gotten over that hurdle, the rest comes easy. Siphoning off some of your paycheck just as soon as it enters your main account is probably the best way to do it and making it automatic makes it 100 times easier. That way, you just don't think about it and then learn to live and survive with whatever you have left in your account until the next paycheck.
My plan started well with opening the account. I put the required minimum in to the account and then a few days later received all the information I needed to log on. A day or so after that, I received my paycheck this month and immediately transferred 10% of my net salary straight into my emergency fund.
How much is enough?
This question is in two parts:
- how much should I transfer each paycheck?
- how much should I save up in my fund?
As always with such questions, the answer very much depends on your own circumstances. Also, different people have different opinions so you should (as always) sit down and have a think about what is important to you, both in everyday life and in the situation whereby you find yourself without a job. Some people may be able to scrimp and save more if they are not earning an income whereas others may not want to save as much in normal circumstances.
For example, my plan is to siphon off just over 10% of my net pay each month and I shall keep going until I have 3 months worth of net pay in my account. Yes, I know this will take a while and I might try for more than 10% but that is my initial aim.
Other figures to consider range from saving 5% to 20% net pay each paycheck. Or maybe a percentage of your gross pay. In some cases, people recommend 3 months of expenses, others 6 to 9 months of gross pay. Whatever you decide, the important thing is to do something. Figure out what you can afford, figure out what you will need in such emergency situations and go from there. You can always adjust these figures as you learn more about your finances.
Let me just re-iterate that again. No matter how much you siphon off, no matter how much you save you'll be in a massively better position than you were before if you had answered no (or worse) to the earlier question. Until you can say "Yes" to "If you lost your job, would you be okay?" then you probably need to save a little more.
I have my fund, what now?
If you've been saving little by little to get your emergency fund, don't stop there. Don't then start leaving that in your normal account for it to sit there saying "Spend Me". That would be like starting a hobby and giving it up the next day. Instead, keep on shaving off that percentage of your income and keep building up your savings with it. Since you've taken that amount of money out of your regular lifestyle there is no need to put it back in. You can survive without it so keep taking it out just as soon as your paycheck hits your account.
What you do with it then is, of course, up to you. Once you are at this stage, you'll be able to answer - with one hand on your heart and the other on your wallet - a wholehearted and resounding "Yes, I'll be completely fine."