Why you need an emergency fund

In life you should expect the unexpected. Financial emergencies come as a job loss, a large medical bill, home or car repairs, or something you have never imagined. The best you can do is prepare for them by having money set aside.

Without that reserve, the usual fallback is a credit card or a loan, which can simply compound the problem. A credit card can stand in for an emergency fund only if you have the cash to pay it off before the interest starts to run. That cash is your emergency fund.

How much is enough?

We recommend keeping three to six months of living expenses in your emergency fund. The most common reason people need one is a sudden loss of income, so it makes sense to plan for that worst case. If you are covered for it, the smaller emergencies, like replacing the geyser, take care of themselves.

Keep it separate

A sound financial plan sets money aside for specific needs: retirement, your children’s education, even the dream holiday. An emergency fund belongs in that plan too, held apart from everything else, so that an unexpected bill never forces you to dip into money meant for something else, or to sell long-term investments at a bad time.

Start small

If you don’t have an emergency fund yet, or find it hard to save, start small. Building up even one month of expenses takes time, let alone three to six. Set yourself small, manageable goals and you are far more likely to reach them.

Where to keep it

An emergency fund has to be safe and quick to reach, so it does not belong in shares. A money market account is a good home for it:

1. 1It usually earns more interest than an ordinary savings or current account.
2. 2Your money is not locked in for a fixed term, as it is with a fixed or notice deposit.
3. 3It is not invested in shares, so a fall in the markets won’t shrink it just when you need it.

This article is general information and not advice. Silke Financial Services is an Authorised Financial Services Provider, FSP No. 12462.