The COVID 19 virus caused a worldwide pandemic unlike anything we had ever anticipated, and many people struggled with the stress that it caused (contender for understatement of the decade?). The virus meant many people continued to lose their jobs, making them unable to afford their cars, homes, and even grocery bills.
The lack of jobs available means those that would be able to bounce back have been left at home with nothing to do, and no money coming in. This is a sight across Europe, America, and Africa and something which many people were simply not prepared for in the slightest.
Some of the fortunate few who had an emergency fund were able to rely on this during an extremely difficult time. Emergency funds are resources much like savings accounts where a small amount of money is set aside each month into the account for the cliche ‘rainy day’.
Because this is your own choice, you can set your limit, choose not to pay in some months, add more money in other months, and even stop paying in completely if you reach a certain amount. Below we’re going to take a look at some of the key questions you’ll ask yourself when creating an emergency fund:
How much money should be in my emergency fund?
Determining how much money should be in this emergency fund is up to you – but you’ll want to consider what it will be used for and how well it will cover you. WealthSimple recommends 3 to 6 months’ worth of salary in your fund. They say if you have 6 months’ worth of savings in your emergency fund, you are in pretty good shape.
Some experts believe having a year’s worth of savings is a better target, considering the pandemic we are experiencing and how long it has had an effect on our lives. Such long-term, life-altering global events have redefined what many now consider viable emergency fund time frames.
Where should I keep my emergency fund?
Your emergency fund could be kept in a savings account, or if you want to try and make a bit of money off this account, you could choose an investment plan. Wonga, who recently wrote on this very subject suggest considering three key questions when choosing a location for your emergency fund:
- Accessibility (how quickly you can access your funds?)
- Interest (how quickly will your fund grow over time?)
- Fees (how much will this account cost month-to-month?)
This should enable you to choose a suitable place for your fund. A money market account might be a good option here, as you can transfer funds instantly and it has a pretty decent interest rate. But, you’ll want to research the options available to you in the current market.
When should I use my emergency fund?
You may be tempted to draw on your emergency fund if you have a cash flow problem at some point. Drawing on the money for holidays or other expenses isn’t what the fund was designed for. You need to define what the emergency fund should be used for, and stick to these rules.
You may want to be able to use this fund if you lose your job, or perhaps it is if you are given an unexpected bill that your normal cash flow won’t be able to cover. It is your fund so it is up to you ultimately when you choose to use it. You may want to open this emergency fund with your partner or a family member so you are both accountable for it.
How can I reach my funding goal for my emergency fund?
Once you have the account and you have set the rules for it, now you will have to start filling the account. You might want to create a direct debit each month which slowly transfers money across into the account, building over time. You may have a savings plan in place that you could use.
Obviously, we have already been through one global pandemic so this emergency fund isn’t going to help you right now – but it could well give you determination for the future in sticking with your savings goals and not drawing on your emergency fund unnecessarily.
In time, you could have a pretty decent emergency fund saved up for in just one year. This can give you the confidence you need going into the future that you are financially secure should something unexpected happen – like a global pandemic!