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Building your Emergency Fund - May 2012

Just how scary is the prospect of a large unexpected expense? Could you handle the cost of a new washing machine, a major surgery on the family pet or any of a million other unexpected financial demands? If your answer is “that’s what credit cards are for” you could be digging yourself deeper into a financial hole.

After meeting your basic needs, having access to ready cash for emergency expenses should be a top priority ideally in the form of a fund that would remain untouched except to cater for unplanned, out of the blue costs.

If you are relying on your credit card just remember that using it is the same as taking out a personal loan at high interest. Not only does this substantially increase the total cost of the emergency expense but it eats into your discretionary income, and reduces your ability to build an emergency fund. Credit cards are not the answer.

No one would argue with the importance of having an emergency fund, but when it comes down to determining how big that fund should be one will most likely get a variety of answers. Financial experts would probably recommend having enough cash to cover 3 to 6 months of living expenses. This effectively means that if you set aside 25% of your after tax pay check it would take you an entire year to create a reserve with 3 months’ worth of pay. No one said it was going to be easy.

Other financial advisors propose that you should have enough stashed to cover the deductibles on your insurance policies. The logic behind this option lies in the fact that most risks are covered by insurance and all you really need is an emergency fund large enough to handle the deductibles. That may work fine for common risks like auto and home insurance but it doesn’t do anything for uninsured risks like an unexpected tax bill, major car or home repairs.

One thing all financial planners agree upon is that you absolutely need to develop the habit of saving part of your income. If your current emergency fund consists of the jar where you toss your loose change it is time to get a little discipline going and to get organized. Your first task is to find a safe place to keep the fund and the easiest way to do that is to open a savings account at a bank. If you already have a bank account, open another one to cater specifically for emergency expenses. Do not place the emergency fund in the same savings account you already have. The temptation to use that money to paint the house or make a down payment on a car will be too tempting. Open a separate account with a specific purpose.

Next comes the hardest part. Set up a schedule for regular deposits to the emergency fund. It does not have to be a huge amount (although the bigger the better) but the deposits have to be made consistently. Think of them as a credit card bill that has to be paid. The objective is to develop the habit of saving. After a couple of months, when you notice that putting aside Eur 20 a week from your usual spending allowance has not affected your quality of life, bump it to Eur 30 a week. As your fund grows so will your desire to add to it.

Set a goal for the total amount that you want to have in the fund. While accidents and unplanned events occur every day, one of the greatest threats from an economic point of view is the loss of income or reduced income. Sit down and carefully determine how much you would need to subsist on for three months. When you arrive at that number you have arrived at the “goal” for your emergency fund.

There is one additional benefit from establishing an emergency fund, and that is the sense of satisfaction that you are doing something positive to take responsibility for your financial future.

FIMBank p.l.c. are the operators of Easisave, a secure online savings account that offers a leading interest rate on online savings accounts. Easisave is ideal for those considering a savings account to serve as their personal or family emergency fund since these funds are not tied for a fixed term. Furthermore, Easisave customers benefit from a high interest on their savings with 24/7 access to their money. For further information please call +356 21322102 or visit