All You Need to Know About Emergency Funds

What is an emergency fund?

Emergency funds refer to an amount of money you keep aside, untouched, to be used in case an emergency arises. Everybody should have but surprisingly most people don’t have it or if they do it’s not enough to cover six months of expenses which is the recommended amount to set aside for emergencies.

Only around 23% of Americans have emergency savings, I couldn’t find numbers about Ireland but I would imagine it’s pretty similar.

Why is it important?

We never know when our car will break or we will have unexpected medical expenses or, in the worst-case scenario, when we will lose our jobs.

We just need to be prepared!

When the first lockdown was put in place in Ireland in 2020, the company I used to work for reduced all employee’s hours by 60%, consequently we just got 40% of our wages. At that time if I didn’t have my emergency fund ready for me I would have ended up borrowing money. Unfortunately, many people were as prepared as me in that same situation. 

When to use it?

On emergencies! (really?)

An emergency is an unexpected situation, urgent and necessary.

Let’s talk about real-life events.

– Something you want for months goes on sale and it’s a unique opportunity to get it 50% cheaper!

Is it an unexpected situation? NO! You might say yes because you were not expecting it to go on sale but NO, it’s not. It was on your wish list for months already, you should have been saving money for buying it instead of using the emergency fund. (Check the post about saving money for your goals.)

Is it urgent? NO! You lived without it until now, you don’t need to get it urgently.

Is it necessary? Depends on what is it you are wanting. But even if it’s necessary, it didn’t meet the other 2 criteria.

– You need to go through a medical treatment that your health plan does not cover, or cover partially.

Is it an unexpected situation? Yes, people never plan to get sick.

Is it urgent? Yes, or it should be, taking care of your health should be prioritized.

Is it necessary? Hell Yes!

Don’t forget to rebuild it after you use it

If you’ve had to use your emergency fund, first of all, I’m sorry, something unexpected and probably bad has happened.

Probably now things are back to normal and it’s very important that you rebuild it to have it ready in case it’s needed again in the future.

How to calculate it?

The general recommendation is that you should have between 3 to 6 months of income saved in your emergency funds.

That is a recommendation though, I like being on the safe side and to me, you should set at least 6 months of income aside.

Start building it

Finally, what you all wanted to hear about, how to save that much money?!

You don’t need to build it overnight, you don’t need to stop ordering takeaways, or whatever you do to make you feel good. (I eat)

• Pay yourself first. When you get your wages, transfer a certain amount to a saving account before paying your bills and spending all the rest.
• Set up an automatic payment to your saving account to make things easier for yourself.
• I’d recommend you save at least 30% of your wages every month, building the emergency savings or not.
• Treat it like any other goal you have and save a little beat every month. (read about setting your budget goals)
• Let’s say you are simultaneously saving money to reach 3 goals, having an emergency fund, your summer trip, and buying a new mobile phone. You can allocate some budget to be saved monthly to each of those goals this way you don’t feel discouraged from doing so much effort to save and not getting anything in return, we are not saving for the sake of just having the money there. We have goals and dreams that money can provide for us.

If you can’t save 30% of your wages at this moment, read the posts about cutting expenses and creative ways to save money. Everybody can benefit from those posts since if you can save more you can reach your goal faster or set higher goals, but I really recommend you save at least 30%. If you can’t at this moment, no panic, this blog is here to help you.

Where to keep this money

• Saving account
• Traditional bank account
• Another bank account – which is not the account you use for your daily expenses.
• Digital bank account

I keep my emergency savings and my monthly budget in different banks so it will not mix up and I won’t, for sure, spend my savings by mistake.

I added digital banks above separately from the traditional banks because to me they are two things completely different. You can easily open an account in an online bank and you have so much more options to split your savings into “spaces” or “vaults” which makes things easier for people to have their personal finances organized.

I use an N26 account to keep my emergency savings and my Revolut account is the one I actually use for my day-to-day expenses.

Both banks are digital, online-only, and they don’t charge you monthly fees just for you to have an account.