Any financially savvy person will tell you that an emergency fund is the most important piece of your portfolio, and that you should have enough cash to cover your living expenses for three to six months.
When it comes to emergency funds, I realised two things:
1. When I’m in an emergency, I’m not saving anything, and
2. Emergency funds don’t just exist to soften the blow when there’s a loss of income – it helps a great deal when you have a medical emergency or serious car trouble.
In a financial emergency, one of many things can happen. I ranked five of these from best case to worst case below (not counting the ones you can easily cover with your monthly savings.)
- Your emergency fund covers your entire emergency, and you still have some cash left over.
- Your emergency fund covers your entire emergency, but there’s nothing left.
- Your emergency fund covers some of your emergency, but you need to take out debt to cover the rest.
- Your emergency fund is non-existent and all you can do is to beg for help, hope for the best or take on some debt.
- Your emergency fund is non-existent and you have back-to-back emergencies.
I have been quite unlucky in recent times and experienced back-to-back emergencies: I had two car accidents in the space of eight months. I was able to cover the first emergency but had nothing left for the second, and I was close to maxing out my credit card.
It was horrible when 22seven said my net worth is negative.
So I came up with a plan to get back in the game. I went back to the steps I discussed in this blog post, I’m channeling about 80% of the money I save every month to repay my debt, and I’m using my #2020SavingsChallengeWithNjabs to slowly rebuild my emergency fund.
I’m approaching this process as if I am starting with my investment journey for the first time. I pay off my debt, I open an emergency fund, and then I invest. As a result, my TFSA contributions have since reduced, except for my investment clubs. I also revised my emergency fund target from three to six months to a full year’s worth of living expenses. Why? Because “living expenses” should also include debt repayments – because they will still be there when an emergency strikes.
Njabulo Nsibande is a Just One Lap user-turned-contributor. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.
Njabulo is a founding member of an investment club. In this blog he shares his experiences trying to work out the intricacies of collective investment in the true sense of the word.
Follow Njabulo’s journey here every month.
Find him on Twitter: @njabulo_goje.
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