Do I need an emergency fund?

March 2020 and Covid was just hitting. Katie and I were in New Orleans on what was meant to be a dream trip. Katie was going to learn jazz piano and I was going to write. We had a lovely house to stay in and we were looking forward to the time of our lives. In the week that followed everything changed.

The Rebel team called me and told me that Google had cancelled our Business School event in New York. Over the next couple of days, every live event that Rebel Business School had on its books was cancelled, one by one. We went from a healthy business with lots of money coming in, to only having money going out. We had fixed costs of £15,000 a month for wage bills, services and more and we had no money coming in.

This was the biggest crisis of emergency that Rebel, and I, had ever faced.

Shit happens

When the pandemic first hit, like a lot of businesses we were scrambling and wondering what had just hit us! All our income evaporated overnight and I knew we needed £15,000 a month just to cover costs.

All sorts of questions went through my mind… do we need to put everyone on furlough? Do we need to cancel every subscription? What do we do? After an initial panic with my business partner Simon, we both took a deep breath and it slowly dawned on us that this was the very reason we had been saving in the business.

We had built up an emergency fund within the business to protect us in situations just like this. We had never predicted something like this but this sure fitted the bill as the mother of all emergencies. I did some quick maths and I realised that we could survive for about 12 to 18 months without a single penny of future income.

We breathed a sigh of relief and started to think more rationally about what we can do as a business and how to respond.

I am so grateful that as a business we had an emergency fund. We had a huge chunk of cash in the business that we had saved over the years in case things went wrong (and something will always go wrong eventually!).

Katie and I personally had a big emergency fund too so if our money dried up we would be ok. We had saved the emergency fund because of things like a car breaking down, a bad tenant in a rental property or losing a client in my business.

I never foresaw the situation where Rebel would lose every single piece of business it had in one week. It had never even entered my mind as a possibility but I was ready for it. We, as a business, were ready for it with cash reserves to get us through.

How many people do you know that lost their jobs, lost their income, or all their customers and they weren’t ready for it. They weren’t prepared with an emergency fund!

If there is one thing I know, it’s that bad things are going to happen in the future and we need to be prepared. Katie and I believe that an emergency fund is the most important tool in your preparation for these “oh shit!” moments.

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What is an emergency fund?

An emergency fund is a pot of money you have set aside (safe from daily temptation to spend it) that you use if an emergency comes up to save you going into debt or selling off investments.

In the simplest terms it is a pot of protection money. Protecting you from emergencies.

​We either keep ours in premium bonds (available in the UK, government backed) or in a high interest savings account gaining a small amount of interest.

How does an emergency fund protect you?

It protects you from going into debt or having to sell off investments in an emergency. Most people seem to think things are going to go well forever. They think they will always earn good money, always have a job and that nothing can go wrong so they don’t save for it.

Then when something does go wrong they don’t have any savings. 15% of Brits have no savings at all! 1 in 3 of us have less than £1,500 in savings. That isn’t going to last long if things go wrong and you lose your job!

What do these people do instead if something goes wrong? They use the overdraft, they use credit card debt, they sell off investments at a loss. There is a saying when investing in property that to look for bargains you need to look for people that are in debt and have to sell. A healthy emergency fund protects this from being you.

If you have to go into your overdraft it can be as high as 50% interest and credit card rates can be crippling. If you have an emergency and have to use debt to survive then suddenly compounding is working against you and it is harder and harder to get out of debt.

We have met so many people through Rebel Finance School that end up in debt because something has gone wrong, they lost a job, had high medical bills or something else.

An emergency fund protects you from going into debt at high interest rates and damaging your financial future. It is critical protection in an emergency.

Think of it as a giant shield that you can use to protect yourself and your family if the world is throwing things at you.

​Recently a friend got me a graphic to say thank you for the Rebel Finance School and the Rebel Entrepreneur podcast. I was so honoured. He had an artist draw me as a super hero. I LOVE IT. You will see in my left hand is a giant Rebel Shield. For me this is my emergency fund. It protects me when the problems happen, when the storm comes.

Imagine the confidence that comes when you have your emergency fund (shield) in place and you can deal with anything the world might throw at you in style!

Alan Donegan dressed as Captain Rebel, shield in one hand and mighty hammer in the other
Captain Rebel

Alan Donegan is secretly Captain Rebel!

What an emergency fund isn’t

It is not an overdraft. It is not a buffer that you dip into every single month because you haven’t saved or budgeted properly. Someone close to me used his to pay for his taxes because he didn’t plan properly. Your emergency fund is not a savings pot for your taxes.

It is a separate pot that is just for emergencies. Your taxes are not an emergency. They are a predictable thing that happens every single year. Save your income for these and keep your emergency fund separate.

How much should you have in your emergency fund?

Step 1 is to get £1,000 (or the equivalent in your currency) into your emergency fund

If you have this in savings already then have it in a separate account, nick name it “emergency fund” and then put the money in there. Most of us don’t have £1,000 lying around and you will probably have to save for this.

Start small if you have to and start with whatever you can. Take a tenner (£10 for non-Brits!) from this month’s income and put it in that separate account. Start to build up your emergency fund bit by bit. Celebrate as it builds and you start to develop your finance protection.

After you have got your emergency fund up to £1,000 it is time to pay down debt as quickly as you can. Anything over 5% interest is to be paid off asap. Get rid of that high interest debt and get out of debt slavery.

Step 2 is to build your emergency fund to 3-6 months of expenses

Once you have your initial £1,000 (or equivalent in your currency) in your emergency fund and you have paid of all your expensive debt (above 5% interest) then it is time to expand your emergency fund before investing. The reason for doing this is to protect yourself from some of the bigger emergencies that come up like being laid off/made redundant or becoming ill for a while.

Two things to note here:

  • We say 3-6 months of expenses. The reason we say 3-6 months is because some of you will be in super secure jobs and will not need 6 months and others of you will have more gig economy work and want to have a bigger emergency fund in case your income dries up. Some of you will be worried about health so aim for 6 months fund, others of you will be young and healthy and will be happy with 3. It is up to you how much you save. Katie and I used to have 3 months but that has increased to 6 months after the craziness of the pandemic.
  • The second thing to note is that it is 3-6 months of expenses not income. You are not looking to cover your earnings with your emergency fund, you are trying to cover your expenses. So if you spend £2k a month in total then a 3 month fund would be £6k (£2k x 3). If you spend £3k a month a 3 month fund would be £9k (£3k x 3). You don’t need to replace your income you need to cover your expenses in an emergency

You also don’t want to have too much in your emergency fund. A lot of people hoard money in case of emergencies and don’t invest it. In times of high inflation savers get burnt. Yes you might be getting 4% interest, but when inflation is 10% you are losing money every single month.

Avoid having too much in your emergency fund and get your money invested so it is working for you. Once you have built up your emergency fund it is time to start investing

Do not invest your emergency fund

DO NOT, I repeat DO NOT invest your emergency fund. Part of the reason for having it is to stop you having to sell off investments if the market is down. It is protection from selling your investments at inopportune moments.

Let’s take an example. If you didn’t have an emergency fund in 2008 and your car broke down and you needed several thousand to repair it you might be forced to sell off some of your investments at a huge loss to pay for the repairs. This would have resulted in you losing a LOT of what you had put in because the stock market was down. If you had an emergency fund in this scenario you could use the cash you have set aside and just wait for the stock market to bounce back up which it inevitably does in the long run.

Do not invest your emergency fund because the money you invest and put in the stock market is for the LONG term (10 years plus) not money that you might need if the car breaks down or the dishwasher blows up!

An emergency fund protects you from selling investments in a downturn and it can’t do that if it is all invested itself!

If you don’t understand what the stock market is and how to invest in it and are keen to learn then either come along to the Rebel Finance School or get started with our investing guide.

It doesn’t feel like an emergency

The fascinating thing is that things don’t feel like an emergency if you are prepared and have a good emergency fund.

If your washing machine breaks down and you have no savings, you are out of spare cash and it is still a week to go until payday it can feel like the end of the world. You have kids screaming for clean clothes and a demanding job to go to. You end up saying things like “why me??”

If your washing machine breaks down, you are busy but you have an emergency fund and you can just call someone to repair it then it suddenly doesn’t feel like an emergency.

The car breaks down or fails the MOT and you wonder how you will survive the extra bills. If you have an emergency fund which is designed for these occasions then it doesn’t feel like an emergency. It is just something that has happened that you are prepared for.

Building an emergency fund can have such a positive impact on your stress levels and your ability to deal with the problems and emergencies that life will inevitable throw at you.

Be prepared. Shit is going to happen.

Build an emergency fund.

How to start your emergency fund

Start small. Open up a separate account in your bank and call it “emergency fund”. Start by putting £10 or however much you can in there this month and start building.

I don’t expect you to have 3-6 months living expenses sat around right now. It might take you a while to build up to that but it is incredibly important.

Start putting some money aside and building up your emergency fund

Next step… find out how to get out of debt as quickly as possible

Thank you for reading!

If you enjoyed this page please share it (or the YouTube video) with someone you know that might need it. These things can make a huge impact on people’s lives as they learn them. A share, like or comment on the channel can help us reach more people and help them with their finances.

Sending you love and I hope your next emergency feels a little bit easier as you are prepared for it.

Love

Alan and Katie

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