Three Things That Should Be in Your Emergency Fund

Linda was proud to have an emergency fund, six months of her expenses to be exact. So when she was laid off from her job, Linda did not panic. After all, she had this fund that could last her until she is able to get another job.

Three months later, her emergency fund ran out and she still has not found a job.

What went wrong?

Definition of emergency and what should not be included in it

"Every month there is an emergency!" exclaimed Linda. So LiveOlive went through the different "emergencies" that befell her in the past year:

  • Friends or family borrowing money
  • A child's school trip
  • Buying school books, supplies
  • Celebrating a family members' birthday
  • Seeing something that she has been wanting to buy on sale
  • Down payment for a new car
  • Re-decorating home or part of a home
  • Gifts for a friend's wedding or birthday

The good news is that none of the things above are an emergency.
The bad news is, well, that none of the things above are an emergency!

An emergency is something that affects either your ability to earn an income – for example getting sick or losing a job – or your cash flow, e.g. an unexpected damage to your home or vehicle.

In these cases, an emergency fund protects you from going into debt or from having to sell assets at a lower price than you would under normal circumstances.

An emergency is also unexpected and tends to be one-off, so if an item keeps on appearing every month, then you need to assess whether it should be a part of regular expenses and should be budgeted for. Use emergency fund wisely so that when a real emergency occurs, you have enough to get through it.

What should be in your emergency fund?

Linda ran out of money in three months although she thought she had six months stashed away. In addition to misusing the funds for different purposes, Linda did not include important items when calculating how much she needed for her emergency fund, such as:

1. Basic necessities

These include:

  • Monthly groceries
  • Transport, e.g. gas, fare
  • Meals when you are working
  • Utilities, e.g. electricity, water, internet
  • Mobile phone
  • Child's school fees and other expenses, such as allowance, books, etc.
  • Household staff salaries

"What about salon visits and shopping? And also my Starbucks? These are basic for me,” Linda asked.

The answer is really about priorities. If you or your husband lose your job, or there is a death in the family, would you really want to spend money on those items?

2. Obligations

In emergency situations, these expenses still need to be paid, otherwise, it will cause more problems, both short and long term.

  • Credit card payments - This is on top of the list because non-payment will result in getting into even bigger debt.
  • Insurance premiums - Some companies do have a grace period, but it is better not to risk this, because in emergency situations, insurance can really help you out.
  • Mortgage - Having to sell your home in a hurry usually results in settling for a price much lower than market price.
  • Car payments - Again, this asset is not liquid so if you do need to sell it quickly, you may not get a fair price.
  • Money for parents - If you have committed to this and do not have any brothers or sisters who can cover this instead, then do include this in the emergency fund.

3. Illness/Getting sick

Medical expenses are often covered by insurance or an employer. However, if you are not sick enough to be hospitalized, insurance will usually not cover the doctor fees and medicine costs. Companies may pay for these, but typically only partially. Your emergency fund can pay for these out-patient expenses that are not covered by insurance or your company.

An emergency is something we don't want to experience. However, we do need to prepare in case this happens. It is always good to prepare an umbrella before the rain, right?

Read this: Planning Household Expenses with Fluctuating Income

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