Emergency fund: Why you need one and how I built mine

Emergency fund: Why you need one and how I built mine

We live in very strange times now and at this moment in history it is even more important to have an emergency fund. An emergency fund is something that would keep us up and running in case we lose all of our income. Let’s say we have a 9-5 job, a rental property and suddenly pandemic happens. Strangely enough this is what is happening now. You, me, your tenant, and lots of our friends and family may lose our jobs.

According to The Trading Economics the total jobless claims in the US since March 21st is 38.6M.

Total US population on May 25th is 330M. That equals more than 10% of US citizens losing their jobs in just 2 months. The chance you, a friend or family member to lose their job is significant. Yes, it is still a chance, but we should not be taking any chances with our finances. Well, what if I tell you that with a bit of preparation, losing your job isn’t going to affect you in the short term?

Despite all of the government stimulus, etc, if you don’t have an emergency fund, you will be in a tough position. You may land a new job soon, as well as your tenant, but until that happens, you may be in trouble. Building an emergency fund that could cover your monthly expenses in an event of losing your income could save you. And it could save your rental property in the long run as well. Let’s see how we could build an emergency find quickly and get ready for this kind of event in the future.

First things first is to calculate your monthly minimum expenses.

That would involve bills, payments on loans and mortgage, meals at home, commute, and medical expenses. Bare necessities. In case you have a rental property, I’d suggest looking at your rental’s maintenance expenses and include them as well. In case you lose your tenant, you’ll want to rent the property to another person quickly. A new tenant wouldn’t consider your rental if they can’t have hot water or heating.

In my case, minimum monthly expenses are about 700-750 Euros/month. I’m certain that I could trim a bit more if I want to, but let’s keep it that way for now. If I have to survive on my own for 6 months, that would mean I’ll need about 4200-4500 Euros. My emergency fund currently is about 5000 Euros, so that would mean that I could survive 7 months w/o trimming anything, or 8 and more if I have to.

Once you’re certain of your minimum monthly expenses, it’s time to start building your emergency fund. Let’s say your monthly expenses are 1000 Euros. If you want to survive for 6 months without any income, you’ll need 6000 Euros. That’s not a huge amount of money, but it isn’t something you could build in a couple of months. One way to start, is by saving money on the side. You could begin taking out 300 Euros per month and have your emergency fund ready in 20 months. That might not be as effective as it sounds, but it still is a way to do it if your income isn’t high enough.

What I did was to ask my bank for an automatic monthly debit transfer from my salary to my savings account. The amount is 300 Euros and thanks to the 2500 Euros available that account, it took me less than a year to get prepared. Yes, I already had some money on the side, it was a lesson my parents were repeating to me over and over. An important bit here is that this automatic monthly debit happens right after I receive my salary payment. This way it is easier for me to fit into the amount left and consider carefully my spending.

You will rely on your emergency fund in case of losing your job or portion of your income.

It could also cover unexpected medical bills or other emergency expenses. Nowadays unexpected events happen and you have to be prepared. Back in 2017 I got diagnosed with Bell’s paralysis. 5 days in the hospital, 3 weeks sick leave, lots of medication, and hospital bills. I recovered quickly, but at a financial cost. Although I have health insurance, I still had to pay additionally at the hospital. The total cost of medical expenses was 500 Euros. If I didn’t have an emergency fund on the side, it would’ve been bad.

Back then I didn’t call my savings “emergency fund”, but I considered these as “emergency money”. The concept is similar and today we added a bit more detail to it. Thanks to this emergency money, I could easily manage this emergency. This fund can be extended to more than 6 months – some people have it covered for 3 years. This coverage is up to you and based on your situation. An emergency fund could help you keep your rental, business, and household run in times of uncertainty.

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