emergency fund

Nobody likes to think what could happen in a worst-case scenario. We're much happier living under the notion that it would never happen to us - until of course it does. All sorts of emergencies can rock our lives with no warning. Anything from an expensive appliance breaking, to loosing a job or suffering severe injury or illness. That last one really hit home with me last year when one of my colleagues was forced into long-term sickness leave. In the paraphrased words of another colleague shortly after he left, 'it's mental when you realise that you canny afford to get cancer.' Mental indeed. It was a stark reminder that it can indeed happen to anyone. Whilst we can't always prevent or predict it, we can at least plan for it. But scarily enough, many don't.

In 2018, The Independent reported that "more than a quarter of UK households have no emergency savings". In America, things are even worse. According to CNBC 41% of Americans would be unable to cover a $1,000 emergency from savings. As two of the most indebted nations on the planet, it seems that Brits and Americans alike are very good at spending, but not so good at saving. While formulating my first budget in 2018, I became very aware that I needed to build my emergency fund, as I too had no funds of any kind set aside for emergencies. In the words of Chelsea Fagan, if you don't have an emergency fund, "it is an emergency that you make one." The reason for this is simple.

If I were to loose my job today, my emergency fund is my safety net, my first line of defence against homelessness. It is where I would go to draw out the money I need to meet my living expenses in place of my monthly pay cheque. The amount you put away depends on which financial expert you listen to. Some will say three months, some will say nine. Others will even say that your first £1,000 is plenty to get you started. But really it's a personal choice that you should base on your own circumstances. If you are a freelancer, you'd probably want a bit more tucked away for a rainy day - maybe even a years worth! You never know when a global pandemic will strike, eh? I figured three months of after-tax income was plenty for me. Be under no illusion, it's a pain in the ass to get there (trust me!) but nevertheless it's essential that you do. You can't afford to bury your head in the sand and say that it will never happen to you. In the words of Erin from Broke Millennial, "...it's the bat that's next to your bed: it's not something that you want to use, but it's good that it's there just in case." 

So since it's a "break glass for money" situation you are preparing for, you don't want to go dipping into that pot every time you want a new pair of trainers. I knew fine well that if I started doing that, I'd eventually run the fund down to zero. And it'd be sod's law that something bad would happen exactly when I don't have the money for it! So to elevate the temptation, I chose to err on the side of caution and opened up a separate current account at a different bank. All that did was introduce that bit of resistance between me and my emergency fund. I still have instant access to that cash, but it's tucked away - out of sight, out of mind.

So I had the account, I knew the figure I had to reach and I knew I had to reach it, stat! But I was 20. I had never seen £4,500 in any bank account in my life. Heck, I don't think I'd ever seen half that in my account before! It was a goal that felt so out-there I wasn't sure I could reach it. So how on earth do you go about saving that kind of dosh?

Again, financial experts can never agree on this. If you were to put four experts in a room together and ask them all the question, you'd probably get four different answers. But I agree with Chelsea, if you don't have an emergency fund, it should be your foremost priority to establish one. That means that all your financial efforts should go into getting your emergency fund in place. That includes paying down debt - which is where the controversy lies. Some experts say that you should save £1,000 as an emergency fund, then start paying down your debt till it's clear. But personally, that wasn't enough for me. If I were to loose my job, I'd be without an emergency fund I could rely on for a while, and I'd have debts to pay. I'd have been broke and in the gutter twice as fast. So I made saving a full three-month emergency fund the priority. That meant that I only made the minimum payment on my credit card and car finance. That way, I wouldn't accrue any more interest whilst I focused on my aggressive savings plan.

I was earning good money (especially considering my age) but nearly half of it came from the overtime I did. As I mentioned on my post starting point, I was regularly working 50-hour weeks. So not only was I knackered most of the time, but I also never really knew what I would be bringing in each month. Course, I had a base wage that was always 'guaranteed', but the extra pay I'd earn from overtime I worked would vary significantly from month-to-month, making it nearly impossible to project how long it would take me to reach this goal. All I really knew was the maximum amount of time it would take - two and a half years. I was able to project this using my £150 regular contribution from my base pay as a guide. It would have been a long slog to the finish line, so in a sense I'm quite grateful for my time spent working as many hours as I did. Although, as you know from my post about balance, it eventually pushed me so close to the tipping point that people were starting to notice that I was different to before.

It did at least serve a purpose. Thanks (if that's the right word) to those ridiculously unsustainable hours, I was able to put away between £300 and £600 extra per month into my emergency fund. Although admittedly, some months it was as low as £200. I was prone to the occasional slip-up in my budgeting those first few months, where I'd slide back into old habits of spending money I didn't have. But it's important not to kick yourself too hard when that happens. Sure, it's sucks, but nobody is perfect. 

It was a long and arduous journey on which I'd draw that bit closer to my goal each month, until one day I finally reached it. All in, it only actually took me eight months. Nothing compared to my two and a half years projection, but again the money in the bank was only half the story, as you know. It's also worth noting that I was still living at home, so actually my outgoings were very low once I actually had a budget!

I was finally able to breath out, relax a bit, safe in the knowledge that I had planned for the worst-case scenario as best I could. Of course a three-month fund won't cover long-term illness, but it covers you during that interim period of being unable to work due to ill health or injury, and statutory sick pay or other state benefits starting - which can take quite a while!

If I were to do it over again, I'd probably have looked for a different side-hustle. As far as I was concerned, my overtime was my side hustle and clearly it worked. But at what cost? I had literally no time for anything else. So I'd probably pick up something totally different instead, something I would be in control of. I wasn't (and still ain't) too proud to pick up something else on the side. If that meant delivering pizza or driving for Uber, I was willing to do so. I think it's important not to trick yourself into thinking that you are above certain lines of work. If you have the time and ability to do something that brings in the extra cash you need, then go for it. To hell with what anyone else thinks about it. If they are happy without financial peace of mind and diversification of work experience, then more fool them.

For more in financial emergencies, check out my worst-case scenario checklist.

~ Aedan.