Before you make any financial moves, a lifejacket, or emergency fund, is needed.
You might see this fund called the back up fund, emergency fund or rainy day fund but it’s all the same and having one is essential in my opinion. Quite simply all this is, is a fund that covers you for unexpected event. Whether it be loss of job, illness or injury, car repairs, natural disasters and any unexpected event that incurs which your normal salary or other money is not able to cover.
This fund needs to be quickly accessible with minimal withdrawal penalty fees and no waiting around for account maturity. How much do you need? This depends, but the rule of thumb I agree with is to have 3x your monthly expenses. So, if one month of your life costs $3000, then you should have $9000.
Now, since personally I do not have typical expenses and could probably live close to a non spending month, how do I calculate my lifejacket fund? I can’t. If I had an equation I would be making it up. So for no reason other than it being a nice round number, I keep NZD10,000 in my main bank account in a long term deposit which gets 3.5% return per year and can be pulled out within 2 business days. I figure, this covers the cost of an international flight, long stay hotel costs and a hefty medical bill. Yachting is a fairly high turnover industry which can motivate people to have a bigger fund, like 6 months of monthly expenditures or more. People have a wide range of risk tolerance so some will prefer to have one years worth of savings and others don’t have any. Research shows that only 40% of Americans could pay an unexpected $1000 without falling into debt and credit card debit is unbelievably high.
The beauty of having an emergency fund is the freedom it allows you. It frees up other money which can be used for investing or business ventures whilst still having a fall back. I put the majority of my salary into my investments (and keep some for spending) with the knowledge that I won’t hit financial rock bottom if I lose my job.