I am getting used to celebrating milestones!
This week, my emergency fund finally crosses over the ‘6 months of living expenses’ line – yay!!!!
I am an impatient person – watching my emergency fund grow ever so slowly has been tortuous, to say the least.
Believe it or not, I have never had an emergency fund.
I had never even heard of an emergency fund.
Until March 2018. When I heard about it on a podcast and read about it in The Barefoot Investor. When I learned that personal finance experts recommend we all should have an emergency fund with 3 to 6 months of living expenses.
I have always understood the concept of saving for a rainy day but never set aside funds specifically for emergencies. Nor have I ever thought about saving a defined amount.
When I was living with my parents, they were my emergency fund.
When I bought a house and had a mortgage, my emergency fund was inside the mortgage. As in I was always ahead in my repayments because my weekly salary was deposited directly into my mortgage account. And as long as I was ahead by $2000, I could redraw the excess payments anytime.
Every time I logged into my mortgage account, I could see how much I could redraw. This in effect was my emergency fund. I got used to seeing this chunk of money as money I could spend. Which was quite dangerous as the money really belonged to the bank, not me. And if they were to change the rules, I would be up sh*t creek.
When I finally got rid of my mortgage, I did feel insecure initially. As I no longer had access to the chunk of money I could redraw any time. So it made sense to save for an emergency fund.
Saving to spend later vs saving money that you cannot use
I am good at saving for the short term, for example for a holiday. And even medium term, as in for a home deposit. That is, I can save for a purpose, to use the saved money to buy something later.
You see, to me saving is just deferred spending. You save money to use it later, to pay for something – a car, holiday, home, bathroom renovation, retirement. Eventually, that money will be spent, even if it is decades later, in retirement.
Saving for an emergency fund, on the other hand is setting aside money that you are not allowed to use! Unless it is for an emergency. Which you hope will not happen. For just in case something bad happens; for example, if you lose your job or your car dies or you have expensive and unexpected home repairs or God forbid, a medical emergency.
A holiday is not an emergency. Nor is getting a new dress for the end of year work Christmas party.
My mindset has to change …
How much do I need in my emergency fund?
The conventional wisdom is 3 to 6 months of living expenses.
But at this stage, I have no idea what my expenses are in a year; only that I lived within my means. So I start tracking my expenses. But I start saving anyway – and confirm the final number much later.
I choose to have 6 months of living expenses for peace of mind mainly. I am fairly confident that I can find another job within 6 months in my field of work. Or I can find casual work as a fill in for after hours or weekend shifts. In other words, I can get by. I hope.
Where is my emergency fund stashed?
Peace of mind is central to my way of thinking. It is why I need an emergency fund after all. So I know I don’t need to rely on my credit cards or a personal loan should any untoward circumstances befall me.
It follows that I want it where it is accessible, not in shares or a term deposit. Whatever bad is happening, I don’t want to have to worry about liquidating shares in a bear market or losing interest if I have to access the term deposit before its term is due.
So my emergency fund is in cash, readily available but in a different bank to my normal every day bank so I am not tempted to spend it all. (Because it is oh so tempting!)
I know there are 2 schools of thought about this, especially about the opportunity costs. Even in an online high interest savings account, the interest is falling all the time and may even enter negative territory. (Read A Family On Fire’s excellent article on negative interest rates here.)
I am willing to accept that peace of mind will cost me a higher rate of return on investment but so be it. Sleeping soundly at night is also a priority.
How did I save for my emergency fund?
I pay myself first.
And automate the transactions.
I decide on how much should go into the emergency fund. And set up weekly recurring transfers from the everyday bank account where my salary is deposited. The amount disappears from my everyday account before I can use it for anything else.
Because soon (two months) after I decide to save for an emergency fund, I discover FIRE (Financial Independence Retire Early). As I am in my late forties, all I can think of is how late I’m starting compared to the 20 somethings and all that missed opportunities with compound interest. I felt such urgency to invest in shares. After all, I have to make up for lost time.
Then there is the retirement account – superannuation. My employer contributes 9.5% of my wages to my superannuation – it is compulsory. But looking at how much I had, there was another panic. I can’t retire well at 65 let alone early! So I start salary sacrificing into superannuation – ie I contribute a pre tax amount. This means my take home pay is reduced.
Now there are so many competing priorities for this reduced take home pay. The emergency fund, the investment fund and have I mentioned the escape fund? ie the travel fund which to date, has been the most important fund. After all that is living expenses. The juggling was … manic.
I start by saving $2000 initially and reduce the weekly amounts while I prioritise the investment fund. Then I switch back to increasing weekly amounts if I feel things are under control on the expenses front. Savings grow at a glacial pace.
In November, I decide to install solar panels. I dip into my emergency fund to pay for it upfront, knowing I will receive a rebate for roughly half the amount from the state government. The rebate arrived in April, some 5 months later! Just as well, nothing untoward happened during this time.
I was back to not quite zero but substantially less.
The game changer
Throughout all this agonising about how much to contribute to which fund, I NEVER ever neglected my travel fund. By this stage, my travel fund was double my emergency fund. (Ummm … I had a travel fund long before I had an emergency fund)
I then did the most adult thing ever! I switch their names. The bigger travel fund is now the emergency fund and vice versa. This is the game changer. It really was the obvious thing to do but it took me many many months before I could bring myself to do it.
Naming accounts is powerful. All of a sudden, that elusive 6 months of living expenses is achievable and I can see the end is nigh! Did I survive on my holiday with my travel fund so radically reduced? Absolutely. I adjusted. And did not spend all of it. So proud of me!
For the last month or so, I supercharged the weekly deduction just so I can reach the goal quickly.
It took me 19 months to finally save up 6 months of living expenses in my emergency fund. Most of which was at an excruciatingly slow pace.
But I can sleep soundly at night now, with total peace of mind.
I am very proud I stayed the course and did not give up.