Do I NEED an Emergency Fund?

If you're serious about winning with money and getting in control of your finances, then this is probably the MOST important topic to get your head around. We're looking at Emergency Funds the most underrated asset in your financial toolkit, why you need them, how to use them effectively and why they haven't worked for you in the past.

Majella is not a financial advisor. The content published is NOT to be considered financial or legal advice and it is for purely entertainment purposes.

Why do YOU need an Emergency Fund?

We regularly hear all of the common, objective, factual reasons on why having an Emergency Fund is a good idea:

1. Stops you from going into debt.

2. Helps reduce financial anxiety / financial stress.

3. Pays for unforeseen emergencies.

4. Covers you for job loss.

5. Restores control in a potentially chaotic situation.

6. Gives you options.

The list goes on.

But today, I'm going to challenge you to look at this question from a completely different perspective.

So let me ask you again, why do YOU need an Emergency Fund?

I mean, objectively, we can all agree it sounds like a sensible thing to have. But for some reason, we all think we are above the Emergency Fund.

When I'm money coaching, 9 times out of 10, my clients say to me:

"Yeah I get it, they're a good idea for most people, but I don't think I need one....nothing ever happens to me... I mean, what could possibly go wrong?" (Famous last words right.)

So I want you to really think about why YOU need an Emergency Fund.

Look at your money personality, your spending habits, your risk tolerance and your general luck.

(I mean some of us have never had a car break down (my husband) and some of us have had it happen too many times to count (me!!)).

Your Money Personality and Values

Your money personality is a big factor when it comes to understanding WHY you need an Emergency Fund.

Each money personality will have a unique reason why.

Different types of drinks represent different types of money personalities.

If you're not sure what money personality you are, take the quiz here.

I'm a saver/splurger with a little bit of a money maker and worrier thrown in there (because we hardly ever fit into just 1 basket), and my core reason for having a fully funded Emergency Fund at all times is the psychological peace of mind it brings.

This sense of peace allows me to take on more risks with my investments because I know that I have a fail-safe in the bank.

I value having that cash security because I see an Emergency Fund as more than simply a practical asset, I see it as an emotional buffer to my investment journey.

Investing and wealth building is an intensely emotional journey and most of our financial decisions (good or bad) are rooted in an emotional response. Most often, the triggering emotion is fear.

An Emergency Fund serves to dull the fear and allows us to make more practical decisions that aren't purely based on mere survival.

You must work out your own unique "why" because that "why" is something that will centre you. It's what you will keep coming back to throughout your financial journey.

Risk Tolerance

With Any Luck...

I am one of those people with plain bad luck. I'm terribly clumsy, I spill every drink and am consistently spotted with bruises.

Bad luck runs in my family, we are magnets for:

• car breakdowns in peak hour,

• plumbing issues on Christmas day, and

• smashed phones minutes after walking out of the store.

We call it the "Dunn Curse".

Prior to the inception of my Emergency Fund, I'd often find myself with an extremely frustrating emergency (or 2), made worse by not having enough funds to fix it.

If I did have cash on hand, it meant taking a gigantic leap backwards in my savings.

Without an emergency fund, you end up with 2 problems: 1. the original emergency, and 2. a money problem (often the money problem hangs around, lingering like a bad haircut and ruining all the progress you've made.)

My husband, on the other hand, has amazing luck, we call it the "Rutty Luck".

He's so intensely positive that he attracts good things. He's the kind of person that has never had a car break down, gets upgraded on flights and wins things at raffles.

But even with the Rutty Luck, emergencies still happen.

It's the nature of emergencies, they happen to anyone at any time. We can't just close our eyes & cross our fingers hoping for the best.

At some point, we have to take a more scientific approach than just relying on our luck or history of minimal crises, and analyse our risk tolerance.

Analyse your RISK TOLERANCE:

• Do I have children or dependants?

• Do I have pets?

• Do I have a car?

• Do I have health complications?

• Do I have dental complications?

• How much is unexpected dental work?

• How much does it cost for unexpected injuries?

• Do I need a functioning laptop / smart phone for work?

• Do I own a property?

  • emergency trades (especially on a public holiday)

  • normal trades

  • break ins

  • insurance excess

  • fixing hot water expenses

• Do I own a fridge / washing machine / appliances?

• Am I renting?

  • Am I prepared for if the house suddenly gets sold or our contract gets broken.

  • Do I have rental contents insurance?

  • How much is it to replace household items if I don't have insurance?

  • Do I need to pay upfront before realestate reimburses emergency trades?

• Do I need to be physically able at my job?

• Do I have ambulance cover?

• How much does it to replace cards in my wallet?

• Is it expensive to replace my car keys / house keys?

• How much is it for emergency accomodation?

• How much is my insurance excess?

• Do I have roadside assistance?

  • Does it cover accidents?

  • How many km does your roadside assistance tow truck?

• Do I have prescription glasses?

  • How much is it to replace them if I lose it?

• Do I have compassionate / carers leave? Or any leave?

• What happens if there is an unexpected death?

  • funeral expenses

  • compassionate expenses

• What happens if there are unexpected legal expenses?

  • divorce

  • civil

  • neighbours

• What would I do if I got a fine / had to pay court expenses?

• If I got summoned for Jury Duty - does this cover my normal pay?

• What happens if I lose my job?

• Do I own my own business?

How To Use My Emergency Fund?

Everyone seems to classify an emergency differently, so it's important that you have a clearly defined purpose for YOUR Emergency Fund.

Certain annual expenses can be budgeted for - these are "foreseen" expenses.

For e.g.

• car registration,

• insurance,

• Christmas / birthday gifts.

These sorts of expenses should be worked into your regular budget and therefore are not "emergencies".

When I first started to build my emergency fund I was confused as to what classified a true Emergency for me. I was using my Emergency Fund for a variety of things:

• any fluctuations in income,

• random bills,

• my annual car registration/service,

• things I forgot to budget for,

• gifts / birthdays that came up etc.

My Emergency Fund was getting a pretty good workout.

Every time I finally reached my goal, I had to use most of it and start saving again.

This meant that it was constantly on my mind. My emergency fund - something that was supposed to be giving me peace of mind - was starting to cause me a lot of stress.

That's when I decided to create a new strategy, one that is simple and stress-free.

I set myself a clear purpose, with clear defined boundaries for my emergency fund.

1. I analysed my spending habits,

2. listed out all of my foreseeable expenses (including annual expenses),

3. created a money management system that accounted for all of this.

My system was based on percentages so that it accounted for my variable income.

I even included a "buffer fund" that accounted for one-off expenses that are random, but not quite emergency level.

Anything that fell outside of this system, that was unforeseeable, unavoidable and urgent, was classified as a true emergency.

Click here to see how I set up a bullet-proof, simple, stress-free money management system that takes only 10 minutes per pay period to manage.

An Emergency Fund normally holds 3-6 months, or even 12 months, worth of expenses.

We go over how to decide how much to put aside in this article.