So now you know how my Emergency Fund is structured, I thought I would do the customary post on how much you should have in it!
There is always a lot of talk about how you should have an Emergency Fund, and then how much should you have in there. The normal guidance is 3 – 6 months living expenses in case anything comes up. I tend to flip around quite a lot on this – at one point I have held virtually no emergency funds (as things came up), and slowly built back up. Right now, if I take just cash and cash equivalents, I have just over 3 months of income available to me (having put half of my cash ISA into CTY). I chose income rather than expenses, as I want to make sure I can still fire off my regular savings investments, and to date the only time I have needed to go into my true emergency fund is when I have taken time off between jobs (it has been up to 3 months) so I always question the validity of this. If I was FIRE then I would probably maintain some form of emergency fund to balance out downturns (likely a year or two’s worth), but right now too much cash seems a waste.
I am experimenting with the Go T’ Pub ISA to see how long I need to keep my emergency cash in the stock market before it becomes a no brainer. Given the returns on cash are so low, automatic reinvestment of dividends from an IT should allow it to grow faster, and I need to be prepared for an up to 50% drop in the price and still be able to sell it. Under no circumstances should you consider this without doing enough suitable research, planning etc. This is most definitely not a recommendation for you!
In essence it comes down to how you want to play it. If you earn £10,000 a month (I wish!) and only spend £2,000 a month you probably don’t need much of one, but if you earn £2,100 a month and spend the same £2,000 a month I would suggest you build one, fairly fast! I take the view that I can cope with “small” emergencies quite easily (e.g. an unexpected car repair bill or boiler repair etc.) on the day to day approach, although that means going into the Cash Flow Fund.
Recently I have found myself questioning what would I need the emergency fund for, exactly. Yes an emergency, but that is a rather flippant comment. What is an emergency that I can’t cover normally. Losing your job is the obvious one, so not living pay cheque to pay cheque will help, and you will need some cash, but how fast realistically can you start work in some form again, be it an Uber drive, shelf stacker or another company in the same career (or even freelance).
I am lucky in that I get paid in arrears (so for the work I do in say April, I get paid at the end of April), and that pays for the next month’s expenses (so May) so I am in a strong cash flow from that point of view, or a bad one that I still need to work! I have yet to lose a job, I have always quit on my terms, so I have been able to build up cash so it didn’t come as a surprise.
I’ve held several parts of my emergency cash for years, and never needed it (granted at one point I did use my overdraft for a month or two).
Why am I moving some of my emergency cash into stock? Well, I want my money to work hard for me. Each £10 a month the portfolio generates, that’s £60 less I need to save into the emergency fund. It’s going to be an interesting experiment, and will take a good 3 or 4 years before it bears any real fruit, and it certainly isn’t for most people, but I work on the principle that I can cover most emergencies as is. Even when we moved home, I only used on fraction of my emergency cash even then – my cash ISA didn’t get touched.
That said – the comfort of knowing I can last a few months, continuing to invest, without a thought is a comfort, although taking money out of premium bonds or a cash ISA would be hard for me… but each to their own!
I certainly wouldn’t be happy with less than 1 or 2 months cash readily available but I don’t feel the need for much more than 3 months whilst I am in accumulation phase – the more that I can get into investments, the better!
How much do you keep in your emergency fund?