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What is an emergency fund?

This is a separate bank account that you create that holds an amount of cash in case of an emergency.

These emergencies could be:

  1. Losing your job
  2. An illness
  3. An unplanned major expense

The purpose of the fund it to improve financial security, knowing you can still live financially if something were to take place.

How much should be in the fund?

The general rule of thumb is to have cash for at least 3 months worth of expenses and spending. But it is up to each individual. The importance is to keep it up-to-date, i.e. if you use the money, then ensure you save more in case another ‘emergency event’ takes place.

I have a home – couldn’t I use a Revolving Credit Loan?

This is actually difficult to answer.

With one hat – using debt to live from is not the right answer. Remember, unless you pay the debt off quickly, the interest accrued on this small debt could be thousands.

If you needed to use $15,000, the true cost of this could escalate to $30,000 debt!

However, if you have a mortgage and you have $15,000 sitting in a bank account as an emergency fund, wouldn’t it be best to pay this into your mortgage and save the interest?

Technically yes, as you could be saving money off your interest.

My preference is to have a separate account, for the following reasons:

It provides clarity about what the amount is
You know when you have used the fund and when to replenish it
You don’t forget you have it
But everyone is different!

What if I don’t have an emergency fund and I lose my job or can’t work?

Loss of income through redundancy or not being able to pay your home loan or rent if you had an accident or illness are the main financial ‘drains’ you can face. Why not get protection in place specifically for these circumstances?