The Emergency Fund and the Stupid Fund
A piggy-bank to save your day, or week, or month, or year.
Before we get to anything else in this series, let’s first figure out your emergency fund situation.
If I took away your job tomorrow and cut out any means of receiving future income or pity money from the doting parents or the concerned boy/girlfriend, because I’m mean like that, how long can you survive with the money you currently have?
A week? A month? A year?
If you answered a year, then you’re good to go. You can stop reading this now and go scroll through Instagram or whatever.
If you answered less than 6 months, then you and I are going to have a longer chat – keep reading.
Pffft, what emergency?
I’m pre-disposed to be an optimist – an idealist, even – and you probably are too. In our minds, our future is nothing but pretty rainbows and chocolate-covered unicorns. But the fact of the matter is, shit happens.
Not all shit is this cute.
losing your job because of bad economy, downsizing, automated robots…etc
being hospitalized and unable to work while being billed for each day you’re on that hospital bed
having your entrepreneurship venture fail on you while your business partners run away with the loot
deciding to elope with your lover and being disowned, left to fend for yourself by family members in the name of love
We all think the above won’t happen to us, until it does. Then we panic because we don’t have money, and we start borrowing to fund our lifestyle and before we know it, we’re deep in debt. And it just spirals downward from there.
As they say, life throws you lemons, and when the fruits smack you in the face, you definitely want to be ready with a blender to make lemonade.
Other options you can do with lemons
What’s an emergency fund?
An emergency fund is just a piggy bank containing enough money for you to live on in case the above-mentioned lemons hit you. There are two criteria you need to fulfill:
#1: It has to contain at least 6-months’ worth of living expenses
If I took your job away tomorrow like I said I would, you’re going to need time to get back on your feet. You’ll have to redo your CV, go prospecting for new jobs and endure multiple torturous job interviews. And all this while, you still have to eat, pay the bills and fill your car with petrol.
If you’re lucky, you may get the job within a month or two. If you’re a baller, you may have even lined up job offers before you got fired. But we will go with the worst case scenario – we will assume that you need 6 months to start earning income again.
You can shorten this to 3 months (if you’re confident), or lengthen it to 12 months, or even longer (if you’re not so confident), however short or long it takes for you to recover from the unexpected curveball that’s come your way. However, I recommend at least 6 months.
So, if you require $3000 a month to survive (and you would already know this because you are tracking your spending monthly), then your Emergency Fund should hold 6 x $3000 = $18,000.
In my case, I have a tendency to drop out of the working world and take mini-retirements when I feel like it. For this purpose, I keep up to two years’ worth of expenses in my Emergency Fund. This means that if all else fails, I can happily not work for two years and still be okay.
#2: It has to be immediately accessible
The money in your Emergency Fund should be easy to get your hands on.
If I took your job away tomorrow like I said I would, you should be able to access that money within the next few days. Whether the money is under your pillow, or in a bank, or in a mutual fund, it should not be difficult to get.
This automatically rules out putting the money in locked investment accounts (like a retirement account that you can only withdraw from when you’re ten thousand years old) or in a property that will take months to sell off (assuming somebody wants to buy it from you).
When an emergency hits you, you do not want to go through unnecessary barriers or roadblocks to buy next week’s groceries. So keep the money close and easily accessible.
In my case, being a Muslim living in Malaysia, I store my Emergency Fund in Tabung Haji, a semi-banking institution that helps people save for pilgrimage and gives dividends on the savings. I can withdraw money with a touch of a button, easy peasy.
Building your Emergency Fund
Once you’ve calculated the amount you need, which in this hypothetical case is $18,000, it’s time to save up for it.
Because the Emergency fund is the most basic of all basics, you should focus all of your efforts and incoming paycheques on building this. Before you do anything else with your money, do this first. I repeat, DO THIS FIRST.
Go low on the expenses for the next few months and shovel all remaining money and any extra money (like the ten-dollar bill you found on the streets) into your Emergency Fund. Continue until you’ve amassed the necessary amount.
Then go celebrate and rest easy because your Emergency Fund’s got your back.
Using the Emergency Fund
Now, I’ll be honest, $18,000 is a lot of money to just be sitting pretty in a bank (or under a pillow). You’ll be tempted to use it – I certainly was.
Once I built my Emergency Fund, I found that my definition of ‘emergency’ became decidedly loose. Things that suddenly became an emergency included:
A new phone (because I need to communicate!) (even though the current phone was perfectly fine)
An impromptu trip to Thailand (because my friend desperately needs me!) (no she didn’t)
Not all of my ‘emergencies’ were flimsy, some were actually for my greater good – I wanted to divert the money for investments, and to subscribe to a learning portal because, hey, life-long learning is important!
Regardless of the purity of your intention, never confuse what an Emergency Fund is for. It is not for shopping or travel, and it is certainly not for investments – those will be tackled separately. An Emergency Fund is only for the times when you have lost income and need to take care of basic needs, or when you are hit with a medical problem that requires funds urgently.
If you’re lucky, you may never have to use your Emergency Fund. If you’re not so lucky, then you may find yourself in a situation where you have to dip into the fund to tide you over until life gets better again.
And that’s okay – that is what the Emergency Fund is for: to give you security when you need it the most and to allow you time to pull yourself back together without having to worry about money.
Maintaining and adjusting your Emergency Fund
Life goes in a cycle, so when life gets hard, it will eventually get better again.
If you end up using your Emergency fund during a bad time, remember to fill it back up again when the good times return. You will need it for the next time that life takes a turn for the worse.
As the years go by, your lifestyle will also change, and accordingly, so will your Emergency Fund needs. You may require more funds to cater to the more lavish lifestyle you’ve built up, or you may decide to become a hermit and require less funds because you’re foraging from the forest and surviving on photosynthesis.
Whichever the case, every few years, revisit your Emergency Fund amount, and make sure it matches your current lifestyle needs.
Optional: The Stupid Fund
Yep. I know this from experience.
Beyond an Emergency Fund, I also like to keep what I call a ‘Stupid Fund’, which caters to all of the idiotic things I do that have monetary consequences.
Getting a parking ticket or a fine for driving too fast (which happens a lot more than I’d like it to)
Losing my phone while snowboarding (which I have already done twice now)
Buying a flight ticket for the wrong dates and having to rebook and pay the fees (ugh, don’t even ask)
These are the kinds of mistakes that anyone is bound to make, and ones that can ruin your entire day or week, and also put a massive dent in your wallet if you’re not prepared for it.
So if you’re up for it, and if you’re prone to making mistakes like I am, build yourself a Stupid Fund. You can give it gentler names, like ‘Ooopsie Fund’ or ‘Did-not-see-that-coming Fund’, whatever you like.
I typically keep a thousand or two in there, but you can decide for yourself how large you want it to be. There are no rules for this one.
Try it out. I speak from experience: you will spend less time berating yourself over an inevitable mistake or two, and you’ll be able to move on that much faster with life because these things are taken care of.
Lastly, if all else fails, try this:
My kind of emergency solution
THINGS FOR YOU TO DO RIGHT NOW
Calculate your monthly expenses – if it fluctuates a lot, err on the high side of the average number
Multiply that amount with the number of months you want your Emergency Fund to last (3 months? 6 months? 9 months? 12 months?)
Open up a separate bank account and designate that as your Emergency Fund
Put money into that account bit by bit until you achieve desired amount
Leave that money alone until an emergency – and I mean an EMERGENCY in all capital letters – hits you.
Once the EMERGENCY passes and all is back to normal, refill the Emergency Fund back up so that it is ready for the next EMERGENCY.
If you want, follow similar steps and build a Stupid Fund.
Next... let's talk about what to do with your paycheque.