Today I am going to look at building Financial Resilience.
Financial Resilience means that you are ready to cope with whatever life throws at you.
Even the best financial plans can be upset by an emergency car repair, a sudden illness or losing your job.
It pays to be prepared for all of these things otherwise you could get caught off guard.
Perhaps a pipe bursts in your house. Perhaps you lose your job or get sick so you can’t work.
The fact of life is that these things happen sometimes and it’s best to be prepared.
There are 3 things you need to have in place to be Financially Resilient. I am going to cover the first (and perhaps most important) of them in this post.
An emergency fund is a pot of money that is easily accessible, that you can draw on in an emergency or in any other situation where you need to get at money quickly.
An emergency fund is best placed in a simple easy access savings account. You probably won’t earn much interest, but that’s not really the point of the emergency fund.
So you may be thinking, “well do I really need an emergency fund?”
The simple answer is an emphatic YES!
If you don’t have an emergency fund and your car needs fixing, how are you going to pay for it?
If you lose your job, how will you cover the bills while you search for a new one?
The answer in most cases is that people go into debt. They use their credit card to cover the grocery bill or pay for the car repairs.
This can be a very slippery slope indeed, and in fact, most debt nightmares start with a simple emergency that people are unprepared for.
This is also the reason why I don’t recommend a credit card as your emergency fund.
Although a credit card can be a vital source of funds in the short term, they can’t be relied upon long term. Sometimes your credit limit gets reduced or in extreme cases, the credit card company can cancel your card altogether.
As such, it is my strong recommendation that you keep your emergency fund in easily accessible cash funds.
So how much should you have in your emergency fund?
As with many things, there is no one answer to this question – just general rules of thumb.
If you still have debts on which you are paying interest, you should probably pay these off before you start an emergency fund. The interest on debt will almost certainly be greater than what you will earn on your savings. Check out this post for my best tips of paying off debt fast.
The only exception to this rule is if you are using good debt in disciplined and advantageous ways.
Once the bad debts are gone, then you can start an emergency fund.
I think that aiming for 3 months’ worth of your expenses is a good place to begin.
I say expenses rather than income because the aim here is to have enough to survive on for 3 months, not necessarily to have enough to replace your income for 3 months.
Now I know that the prospect of saving 3 months worth of expenses can be really hard and so it is best to take things one step at a time. When I first started saving, it felt great just having 2 weeks of money in the bank!
If you are struggling to find money to save out of your regular income, you could think about a side hustle to earn some extra cash that could give your emergency fund a jump start.
Once you have 3 months’, then try and achieve 6 months’ worth of expenses as your emergency fund.
This will be enough to cover almost any unexpected emergency and it also gives you up to 6 months to find a new job (or, even better start your own business or side hustle) if you lose your employment.
Eventually, I would suggest you aim for up to a year’s worth of emergency fund.
Although some people would call this excessive, when you have been through the amount of emergencies that I have (near-death experiences included), then you really appreciate the value of having that money behind you!
With a nice 12-month emergency fund behind you, you can sleep easy at night knowing that even the most serious of financial emergencies is well and truly covered.
The final reason why having a strong emergency fund is great is that it allows you to take advantage of any investment opportunities that might pop up.
Think about it, if you have no emergency fund at all or all of your money is tied up in investments, and then a great investment opportunity comes up, how will you take advantage?
If you have a healthy emergency fund to cover say 12 months, then you could safely invest half of that money in an amazing opportunity and then replenish your emergency fund later on.
I have recently invested £20,000 in a friend’s business in the AI space.
This investment has the potential to 100x my money and I would not have been able to take advantage if it wasn’t for my healthy emergency fund.
Don’t get me wrong – investments like this will always be risky, but that’s the reason we have an emergency fund in the first place. If the value of your other investments fall, you have a ‘safe’ pot of money to draw on until things recover.
Having a good emergency fund also makes it a lot easier to start a business or suede hustle. If you have no money behind you at all, the thought of going it alone can be too much to cope with.
If however, you know that you will be ok for at least a year, it can really help you to take the first leap of faith and quit a job you hate or start your dream business.
With your emergency fund now in place, the next step in building Financial Resilience is making sure you have the right insurance in place.
Stay tuned for the next post to learn all you need to know about insurance.