Starting your financial independence journey is incredibly exciting and empowering. Like any journey in life there will be ups and downs, that’s expected, especially as you maintain your upwards trajectory. To deal with life’s uncertainties it’s vital to have a safety net to support you in your journey and provide you with security and breathing room to achieve your goals.
NOTICE: The content of this article is not to be considered as a legal opinion, financial advice or tax advice. Millionaire Wealth Guide does not hold itself out as a legal, financial or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.
What an emergency fund is and why you need one
An emergency fund in its most basic form is an amount of money set aside to cover your essential spend and any unexpected costs that come up. For example, picture an unexpected car bill, medical bill, or even job loss, we’ve all been there, and it can be stressful! An emergency fund is what supports you in navigating these unexpected costs and life situations while helping ensure your broader financial objectives are not wrecked. Psychologically, having a safety net in the form of an emergency fund, can make all the difference in motivating and achievement of your financial independence objectives by smoothing out the bumps.
How much should your Emergency Fund be
A good rule of thumb is to have 3 times your monthly living costs and if you want to be even more conservative 6 times. Your monthly living costs represents your core living expenses and includes your housing costs including utilities, any debt repayments like student loans, food, and healthcare. It does not include discretionary spend like personal travel and recreational activities for example.
Lets now showcase this is an example:
- Rent – $1,750
- Utilities – $300
- Food – $350
- Student loan repayment – $400
- Healthcare – $150
Total living costs = $2,950
Total emergency fund recommended = $2,950 x 3 = $8,850
Reaching your Emergency Fund in lightning speed
So you’ve calculated the emergency fund you need to guardrail your financial independence journey and provide you with peace of mind! The emergency fund really can be considered step 1 of freedom by virtue of it providing you with that essential breathing room. Therefore, achieving this as soon as possible is in your best interests! It’s a good idea to cut discretionary spending and move these savings over to your emergency fund. You can even consider a side hustle, working overtime to get these core funds set aside.
Where should you keep your Emergency Fund
By definition an emergency fund is something that you should have easy access too and is safe. However, easy access and safe are relative terms, also easy access has previously meant low or no returns but in today’s market you don’t have to settle for that. Instead, in the current high interest rate environment, you can benefit by opening a high interest instant access savings account paying in excess of 5%.
Next steps now that you have your Emergency Fund in check
When you reach your emergency fund target or if you’re already there congratulations! Now that you have it setup, its important to leave in untouched unless it truly is an emergency hence the name. Finally, having your emergency fund setup goes beyond financial independence, it’s a vital foundation for your financial future to protect you against any bumps in the row.
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