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Do you have an Emergency Fund?

An emergency fund is often not something one budgets for or ever thinks necessary. If you have an emergency fund, read on regardless, because it is always comforting to have an endorsement to stave off temptation to spend the fund on something other than an emergency. An emergency fund is a fund set aside in the event of personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense.

There is often debate on how much is enough for such a fund. Some planners would say 6 months; some go so far as to say 8 months and some only 3 months. The answer depends on your circumstances, such as if you are self-employed; a contactor; your general cost of car maintenance; family or personal medical health and cover; your cost of living; whether you have life insurance, TPD or medical insurance; your level of debt and the gap between your expenses and earnings. On the other hand, it could be as simple as what would you need to have as an emergency fund that makes you feel safe should the need arise to get your hands on ready cash.

If your margins are tight, look at your overall spending and shop around for better utility costs, maybe transfer credit card debt over to a lower interest card. Take packed lunches for a while. Sacrifice 2 – 3 coffees per week. Look for areas where you can trim your expenses and put that amount towards an emergency fund. About 5 years ago, I decluttered my home and sold the items on Gumtree and eBay as well as held a garage sale. I made about $700 and was able to save that straight into an emergency fund. It is a fun way of making money and cleaning up the clutter at the same time.

One issue is that there is always the temptation to spend the money on things that are not emergency related. Once your emergency fund is put aside, you could then start saving for that flat screen TV or a new unit or a weekend away. Another issue is where and how to start a fund if you don’t have one. The idea of accumulating 6 – 8 months worth of living costs is enough to fill you with dread and may even leave a noticeable whole in your expense and earnings cycle. However, if you start small and allow it time to accumulate, you have a much higher chance of succeeding. Set reasonable goals such as $300 – $600 setting up a direct debit for say $20 – $40 per week. A good idea is to open an online savings account, separate from the one you normally use for your emergency fund. It is a way of putting money away that cannot easily be touched. It may even earn a bit of interest. Once you have the fund set up, use it for emergencies. Don’t be tempted to save it and put the emergency on the credit card. The idea of an emergency fund is exactly that – an emergency.

If you are hit with an emergency and you have not yet put your funds aside, do not despair. Don’t panic as this leads to bad decisions. Still make it your goal to create a fund but speak to your Hudson adviser for a safe way to free up cash for the emergency and make a contingency plan going forward. 

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