An emergency fund is money that you’ve set aside, well for an emergency or a “rainy day.”

Generally you want to have 3-12 months of your expenses set aside.

 

This gives you a buffer for:

• An unexpected expense
• Losing your job
• Quitting your job
• Slow periods in your business
• Getting injured or becoming sick where you cannot work
• Taking unpaid leave for personal or other reasons

 

Why 3-12 months?

Having enough savings to cover three months or more of your expenses will allow you cover a one-off expense like a vehicle repair, and let’s face it your bills will keep coming in regardless of whether you have a disruption in your income or not. The savings allows you some space to make a transition to another job or career, or time needed to recover from an event or injury.

Injury or Disability

None of use plan on getting injured or becoming disabled but life happens. Everyday people are injured on the job, at home or on the road.  Public disability programs and private insurance policies (if you have one) often require a period of 60-90 days before they become active to provide funds. During that time, you will need to have money on-hand to cover your expenses.

Also depending on the support, you may not be able to replace all your income, so the additional savings can help you bridge that gap as well.

Loss of employment

Jobs aren’t the most reliable or permanent things these days.  Our jobs may determine that we are no longer needed following a restructuring, during an economic downturn, or other event (as I’m writing this we are dealing with a viral pandemic).  Depending on the situation you may or may not receive a severance (from your former employer) or qualify for a government unemployment program. In either case having money set aside will allow you to continue to cover your responsibilities until you find your next job.

Again, if you do receive a severance or qualify for unemployment, your emergency fund can help you cover the difference between your external support and your on-going liabilities

Quitting your job

We have all had those days where you tell your boss to take a hike and kick rocks, because we don’t need this stinking job.

“I’d quit but…”

“… I have mouths to feed.”

“… I have rent to pay.”

“… I have a car note to pay.”

 

Work that is not fulfilling is stressful and many people would like an escape, but here’s the thing, if you have no money saved, you feel like you’re kind of stuck, right?

An emergency fund can lower your stress because that thought, or dream can be a reality at least temporarily.

If, for example you have six months of expenses saved and you have a bad day that turns into weeks or months and you’re fed up, you’re done.

How would you feel about putting in your notice?

A lot better than if you don’t know how you’re going to pay your bills. Am I right?

Slow period in your business

For most entrepreneurs we have great times and not-so-great times.  Setting aside a reserve during the good times will assist you in getting through those not-so-good times.  It’s way better to be able to rely on yourself, than on a loan from the bank or support from the government when times get hard.  Besides the whole idea of going into business for yourself is to bet on you!

Having an emergency fund greatly reduces your stress.

Once you have money set aside to cover your expenses in an emergency, you've given yourself room to relax a bit.  You have that peace-of-mind for the unexpected, and you have that escape hatch if you ever really feel like you need a change.

So how do I get started?

There several ways to get started, anywhere from setting up a separate bank account with an automatic transfer or setting aside your spare change at the end of the day.

In my next post I’ll discuss some ideas on how to get started building an emergency fund.