Emergency Fund or how to deal with WTF-situations

Dear Reader,

Today’s topic is maybe one of the most important one of the personal finance: the emergency fund.

An emergency fund is essentially money that has been set aside to cover any of life’s unexpected events or so called WTF-events. If you are new to the personal finance world, building up an emergency account should be your priority!

How much should I accumulate in my emergency fund?

Most experts believe that you should have enough money in your emergency account to cover at least 3 to 6 months’ worth of living expenses. By living expenses, I mean the strict minimum you need to continue to live a decent live, this excludes following expenses:

• Dining out
• Non-essential shopping
• Entertainment (Netflix, Spotify, etc…)
• Nights out
• Clothes
• Starbucks (coffee, drinks, etc…)

It should only cover your basic needs:

• Rent
• Food
• Health care
• Transportation
• Personal expenses
• Mortgage’s interests

That’s what experts would recommend you, I personally think that we should take a more conservative approach. Your emergency fund should cover 3-6 months of expenses. Period. Not only critical expenses but all your expenses.

Use your spending habit to estimate how much you need to save

I don’t know about you, but in my very personal case this amounts 18-21K. I basically have a monthly spending of CHF 3-3.5K. Therefore, with regards to my monthly spending habit, I have to stash about 20K in my emergency fund. As you can see, it is not rocket science!

Do I really need to have an emergency fund?

YES! People who have had large and unforeseen expenses arise can probably testimony about how happy they were to have an emergency fund. On the contrary, people who were lacking cash can tell you about how difficult it was to find the money to cover expenses and overcome the situation.

Let’s illustrate this with examples, taken from my personal experience:

1. In 2010, after one of the worst financial crisis of all time, the father of one of my friend had to deal with a divorce. His wife left him overnight and the poor man got devastated. Usual story you may say, but since this relationship wasn’t ending in the friendliest way, they engaged in expensive lawsuits, resulting in him owing his wife and his attorney large sums of money. In the end, he even had to sell a big part of his stocks at the very worst time ever in order to meet his financial obligations!
2. When I was a child, after spending a wonderful time with my family during the summer vacation in the southern part of France, we had a car accident on the highway. A truck literally crushed the back of our car. Long story short, no one was hurt but the insurance took 6 months to cover the car accident costs. My parents had a very bad time and struggled to pay for a new car while shouldering the living costs of the family. They literally went frugal berserker 😀
3. My sister had a lovely surprise when buying a property. Indeed, she and her husband had to find 30K to buy some useless piece of land they were not supposed to buy in the first place. The communal authority had decided they were obliged to acquire this piece of land with the rest of the land. Unfortunately for them, the financing round was over, and the bank refused to lend them more money. They ultimately end up eating all different types of pasta for the next few months.
4. Rising interest rates, a classic! My parents (again) bought a house and after a few years, they had to refinance. They weren’t that happy to pay 6% on their mortgage for next 7-8 years. Unfortunately, they didn’t have cash at hand to repay a part of their mortgage and reduce the interest burden.
5. One of my friend got fired recently and still struggles to find a new job. Fortunately, he could moved back to his parents’ house. Without the support of his parents, he would be in deep shit.

I could go on with more examples, but I believe that you got the point, no one is immune to WTF-events.

Start your own insurance company

I like to picture my emergency fund like my private insurance company. I litterally set some cash aside in order to be able to overcome sudden WTF situation. Each month, I dedicate a part of my money to my emergency fund and insure me against the worst case scenarios that life can provide us with.

Conclusion

Money is all about happiness. and no one likes to be involved in stressful situations. I personally have experienced financial distress through my life and its consequences are sometimes tough and unpleasant. WTF events are stressful situations per se, so don’t add financial stress to the situation.

I really believe that an emergency fund is a key factor in successfully weathering the storms we are all sure to face in life. WTF situations happen all the time, that’s life, but you should prepare accordingly. So, stash some cash and buy peace of mind!

Cheers!

And you? Do you have an emergency fund? How much? Why not? Let me know in the comment section!