The Freedom Kit: Why you need an emergency fund and the easiest way to get it

Let’s face it, a crisis happens when you least need it. So, a cash reserve, specifically for unplanned expenses or emergencies will cushion the blow, whether it’s car or home repairs or medical bills. It is possible to insure against bigger things, like premature death or loss of income, but very ordinary financial shocks, even minor ones, can be a setback too. And, if it turns into debt, especially with credit cards or loans, this is expensive debt that’s generally harder to pay off. Borrowing money at short notice is always costly, and is another hassle you can do without in an emergency. Plus, there is the temptation to pull from other savings, like a pension or retirement fund, and that can have a lasting impact.

Get the habit

Building savings is easier if you’re able to consistently put money away and watch it grow. Sticking to a savings habit is easier if you set a goal; maybe putting 5 per cent of your earnings away each year. Setting up automatic transfers from your income works best, as you’re less likely to miss money you never had in your hand, or on your Apple Pay. Get a deposit account that you cannot access automatically online; it’s too tempting to dip into savings, and needing the newest Jimmy Choos is not an emergency.

Saving cash at home, or elsewhere, isn’t recommended either. As nice as a stash of cash can look, it, too, is easy to dip into and can be stolen, lost or destroyed. If you occasionally get a bonus, a tax refund or birthday cash, or you sell off something, then add some of that to the emergency savings fund too. Or look at ways to earn some additional income for a while, maybe renting a room or teaching part-time classes. Regularly monitor your progress; it’s easy with online and phone app banking, and watching money grow is encouraging.

How much?

Everyone’s situation is different in terms of emergency money. If, for example, you pay annual private health insurance, a medical emergency may not be as significant an issue. But if the car has a little disagreement with a bollard in the supermarket carpark, panel beating and paint can easily run to €2,000.

Ideally, try to get to a point where you have a minimum of three to four months’ net salary in an accessible savings account, in case of an emergency. That’s just a rule of thumb, but there are calculators online that help you tot-up your general outgoings, and risk, to estimate a good target. This should be separate to short-term savings for things like holidays or a car upgrade.

And creating a contingency fund needn’t rely on earning more. Cut back on outgoings that are not absolutely necessary, in favour of the comfort of rainy-day money.

Review household expenses from your monthly bank statements, and you should hopefully find that there are items you can do without, or get a better price on, like the mortgage or insurance policies. Check your credit card line-by-line and you’ll be amazed at the amount of unused subscriptions and unnecessary spending you can cut back on. Change your thinking; set limits – such as you won’t spend more than €250 on anything not absolutely essential to your life! This will pave the way for quick and easy saving every month, and a warm feeling of virtuosity.

Money Manager

Apart from the peace of mind that a setback will not derail the family finances or an emergency requirement simply won’t be met, building an emergency fund shows you what is possible in terms of managing your finances. A good savings habit can build into longer-term savings goals to grow your money. Deposit interest rates are low but, once immediate access isn’t needed to a cash reserve, then there are alternative savings and investment options to look at. These include unit-linked funds, investing in a range of assets, like stocks, shares, commercial property, and also low-risk Government and corporate bonds.

Retirement planning is key, and putting money away for pension time is wise, especially as so many are living way beyond retirement age these days. Investments and property are often part of the bigger picture of what will fund the household when you’re no longer earning. Saving into a pension, however, is a no-brainer, and should be a priority for everyone. No other savings vehicle offers the same benefits. There is tax relief on premiums paid, the fund grows tax-free, and, at retirement, you can take some of the fund tax-free.

About Carol Brick

Carol Brick is managing director of CWM Wealth Management and HerMoney. A qualified financial advisor with over 25 years experience in all aspects of high-level financial planning, she specialises in the area of Asset and Wealth Management. See hermoney.ie or cwmwealthmanagement.ie for more details.

About HerMoney

HerMoney provides tailor-made financial solutions to self-employed professional women and service contractors all over Ireland. With offices in both Cork and Dublin, the business is a sister company to the long-established CWM Wealth Management.