Building an emergency fund is a crucial part of financial planning regardless of whether or not you’re an expat. It is one of the foundations of the ‘Financial Planning Pyramid’ that need to be in place before you even begin to look at investing and retirement planning. You can read about the ‘Financial Planning Pyramid’ in this post.
What is an emergency fund?
An emergency fund is basically a bank account holding money that has been set aside specifically to deal with unexpected expenses and financial emergencies. To ensure liquidity and ease of access, these funds should ideally be kept in a savings account.
Having an emergency fund gives you some wiggle room in the event of something unexpected happening that requires quick access to money.
Examples include things like:
- Losing your job
- Unexpected flights required in the event of a family emergency
- Medical expenses
- Car repairs
- The water boiler or some other major appliance breaking down
- Home repairs due to flooding or other reason
The idea of setting aside these funds exclusively for emergencies is so that you won’t need to have to rely on credit cards or loans to get you through these events, which can easily put you on the path to debt or push you into further debt.
How much should I keep aside?
It really depends on your personal situation, but the general recommended amount for an emergency fund is usually cited as a minimum of 3-6 months’ worth of expenses. However, this is only a guide and I know many people may struggle to build that amount quickly.
If you don’t have that kind of amount stashed away just yet, don’t worry – any amount is better than nothing, but a good target to start with is around $1,000 or currency equivalent.
How to build your emergency fund?
Okay, so if you don’t currently have money ring-fenced for emergencies, then the next question might be: “How do I accumulate that amount as quickly as possible without impacting on other financial commitments?
The answer: Have a plan and stick to it.
How much you set aside each month for this purpose will depend on your circumstances and how quickly you want to cross this off your list.
Set a monthly goal, but I would suggest at least 10% of your total after-tax income if you can.
Remember that the emergency fund is for emergencies and you should never dip into it unless it really is an emergency situation.
If you don’t yet have an emergency fund or it is still below the recommended amount, I have outlined a few suggestions to consider that might help you get there a bit faster.
1. Sell something
Almost all homes are full of items that are no longer used – even when you’re an expat and your living situation feels a bit more temporary. It really doesn’t take that long to accumulate stuff you don’t need, especially as kids get older and appliances get upgraded, etc.
Common items that could could be sold for a bit of extra capital include things like:
- Kids toys
- Kids clothes
- Unused electronics
Many expat groups on Facebook allow you to post items for sale, so worth checking there.
2. Find a second job or “side hustle“
I don’t really like the term “side hustle”, but all the youngsters on the internet use it, so I guess me calling it a second job just shows my age.
As an expat, it may not be so easy to find additional employment locally, but there are numerous side hustles you can do from home and online.
A lot of these can be done in the evening and whenever you have time. Check out things like blogging, vlogging, virtual assistants and drop shipping.
However, be careful of a lot of the get-rich-quick claims made by bloggers and MLMs, as there are often a lot of half-truths and outright lies out there.
3. Reduce your spending
Over-spending is not an uncommon trait among expats and I have written about it here.
Audit your monthly spending and see where you can make reductions. Typical examples include:
- Cutting out or even reducing the take-away coffees
- Buying cheaper brands of food
- Ditching subscriptions (gym, app services, etc.)
- Giving up smoking (double plus here, as it is a good lifestyle choice)
- Switching to a cheaper mobile phone plan
- Saving you next salary bonus or tax refund
- Dining out less
- Saving spare change in a box/glass jar
Basically, do whatever it takes in the short-term to get you to the goal.
If you can, schedule regular payments from your current/salary account to the designated emergency fund account, so that the money doesn’t get spent elsewhere.
4. Track Your Progress
Check your progress regularly – either on a weekly or monthly basis. It is good practice to record your spending each month anyway and a good option is to use an app, such as HomeBudget.
You can read more about how to track your spending here.
If you’re falling behind target, the reviews will enable you to identify where and how you can improve and if you are on or ahead of target, seeing that will provide the confidence boost to repeat the success the following month too.
The whole point of an emergency fund is to have quick access to cash whenever you need it. Therefore, it needs to be liquid and the general advice is that the best place to hold it is probably in a low-risk savings account, which is pretty much any basic savings account you can get at any high-street bank.
Where should you keep an emergency fund?
Some people are concerned that they are wasting potential investment opportunities, but that is the trade-off for having money available for emergencies.
It’s a bit like insurance – people moan that it’s a waste of money and if you never have to make a claim, it definitely feels like there’s some truth in that.
But for that one occasion you might need it, it provides peace of mind and assurance.
If you invest your emergency money in funds, you have two potential problems.
Firstly, the fund needs to be sold and the settlement can take several days, which means the cash won’t be accessible until then. Even the most liquid of ETFs and stocks will take three days to settle and then you have to move the money to a bank account, which can take another day.
So if you sold your stock on a Monday, you could expect the money to be received in your trading account on Thursday, but you might not be able to get that cash from your bank account until Friday. In an emergency situation, that might prove to be too late, so you need to be aware of this potential issue.
Secondly, being invested in the markets, while giving your money the opportunity to grow, also means that it is susceptible to loss.
This could present a situation where you have a shortfall in the event of an emergency.
If, on the other hand, you keep your money in a savings account, at least you know exactly how much is available and that you can access it immediately.
Having said all that, I sometimes think this advice is a little dated, since there are other ways to hold liquid assets, such as on a Visa pre-paid card or in your WeChat app (if you live in Asia).
Ultimately, it doesn’t really matter, as long as it is remains safe and quickly accessible.
To conclude, an emergency fund is an important part of financial planning that should not be overlooked, but a lot of people don’t have any cash they can dip into at short notice – or even at all – and of those that do, it is estimated that less than half of all people have enough saved to cover any more than 3 months’ living expenses.
Don’t ignore the importance of having easily accessible cash available.
It may seem like a waste to have money just “sitting there”, doing nothing, but think of it like a life preserver on a boat – if you fall into the sea, you might be able to swim back to safety without being thrown one, but it will be a lot easier if there’s one to hold on to.
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