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191 Why everyone needs an emergency fund

July 07, 202112 min read


Have you noticed that when unexpected expenses occur, they usually come in threes? That’s only ONE of the reasons why everyone should have an emergency fund!

A crucial element of financial freedom, an emergency fund can prevent you going into debt, and in this weeks episode I go into detail about WHY it’s so important, and I tackle some of the questions that arise when the subject does.

So start today, save a little bit each month towards it. Pay your future self first, and when an ‘unexpected’ expense happens, you will have that money available to use as you need.

Show notes:

  • [01.15] There are four reasons why it’s so important

  • [05.14] So how much do you need?

  • [06.28] What do you use it for?

  • [08.58] Where do you actually put the money?

    • Do NOT use your access bond or mortgage home loan for this

    • What you should use for your emergency fund

  • [14.42] So how long should it take you to get to six months of savings?


“One of the biggest reasons people get into debt is because of ‘unexpected expenses’.” – Lisa Linfield

“Unexpected expenses absolutely can be planned for.” – Lisa Linfield

“Knowing you have a big safety net is peace of mind like no other.” – Lisa LInfield

“You need to pretend that your emergency fund doesn’t exist.” – Lisa Linfield

“The biggest trap people fall into is that they keep using capital to fund emergency expenses or short falls in their income or increased expenses, instead of cutting their expenses to match the season they’re currently in.” – Lisa Linfield

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191 – Why everyone should have an emergency fund

Hello everyone and welcome to today’s episode of Working Women’s Wealth.  I’m Lisa Linfield and I’m building a community of Women who are committed to the journey of living Financially Free lives – so that we can have the money that enables us to CHOOSE – IF we want to work, where we work, and when, so that we can follow our dreams.

Today we’re going to chat about something I have spoken about before, but in talking to a listener the other day, realised I may not have stressed quite how important it is enough.  So, for clarity, I want to stress that:

One of the most important elements of financial freedom is an Emergency Fund.

Yes, that’s right.  It’s THAT important.

There are four reasons why it’s so important

1.       Life Happens – one of the biggest reasons people get into debt is because of ‘unexpected expenses’.  Medical, kids, family members, cars breaking down, roof’s leaking.  And people always tell me that they can’t budget for them.  No, you can’t.  Because there is no guarantee as to what and how much it’s going to be.  But there is one thing I can guarantee.  You WILL have unexpected expenses.  Something IS going to happen in the next 5 years that will need your money.

2.       It prevents you going into debt – as I mentioned, what usually happens is that when these unexpected expenses take place, people pay for them via the credit card or personal loan.  As I mentioned in episode 166, it’s so important to understand the REAL cost of debt.  It’s not just the interest – it’s the monthly fees, penalty fees and insurance costs that come into play – and those added costs put you further behind.

3.       Peace of Mind – this is by far the most important factor.  No one could have predicted the pandemic’s impact on people’s personal finances.  But one thing I saw is that the emotional stress of people who had an emergency fund was way lower than those that didn’t.  Knowing you have a big safety net is peace of mind like none other. 

4.       The ability to keep investing - What also was so interesting through the 2020 Pandemic stock market crash was how those with emergency funds were able to keep investing their automatic debit orders through the crash – and therefore continued buying when prices were at record lows.  Then, as the market rose, those months of buying low meant that as it rose, they really made a lot of money.  Those that didn’t have emergency funds ended up going into panic mode, stopping their debit orders, and saving the money or using it to pay expenses.  What’s also interesting is that many of them got used to having the money to spend and haven’t got back to their same level of investing as before the pandemic.  Setting back their financial freedom goals.


So how much do you need?

As always, it’s difficult to advise you personally as I don’t know your circumstances.  Do you just pay for the nice-to-have’s and your partner pay for the essentials? Or do you pay for the essentials?  Does your partner have a big emergency fund?  Are you self-employed?  Or is your salary predictable?  Do you have multiple sources of income so it’s unlikely all of them will shut down at one time, or is this it?

Each one of my clients has a different recommendation… but, as always, here’s a rule of thumb for you.

·         The absolute minimum you should have ever is 3 month’s worth of expenses.

·         On average you need 6 months.

·         If you are a business owner, aim for 6 months in your personal capacity and 6-12 months in your business.

The reality is if you budget on 6 months, including the amount you need to continue investing, if the worst comes to the worst and you lose your income, you could stop investing, cut your expenses and live for longer.

What do you use it for?

Emergencies.  Literally, only something external that happens TO you.  Your company let’s you go through retrenchment; the roof needs repairing; the car breaks down; your child breaks their arm. 

I can’t stress enough how important it is that this is NOT a situation of you running short on this month’s expenses, so you dip your hand in the Emergency cookie jar.  It is extremely important that you’re disciplined about this.  Why?

Well, I’ve watch clients try and build up their emergency fund, and never quite make it because they keep dipping their hands in, because they run out of cash in the month.  Then, a real emergency happens, and they have no choice but to cash in investments or use their credit card.

If you’ve listened to episode 172 – The Brain Hack you can use to grow your investments, you’d have heard about the entire money system I get you to automate.  Absolutely crucial to preventing using debt or having to cash in investments is the Cashflow Account and the Emergency Fund.  So where do you go if you need money because you’re short, and it’s not something external that’s happened to you?  You go to your cashflow account.

You need to pretend that your emergency fund doesn’t exist, and that it’s not even a possibility for you to access it…

… which brings me to the next question…

Where do you actually put the money?

Now this has been a personal challenge for me, and so I’m going to be really honest with this.

Do NOT use your access bond or mortgage homeloan for this

Before I became a financial adviser, this is where our emergency money was stashed.  We’d smash a huge chunk of the mortgage with a bonus or saving.  Then, put salary money in the mortgage, and draw out from it.

Now, I’m fully aware of what they call ‘one’ accounts and the theory behind them… that by stashing the cash in the mortgage, mathematically you’re way better off because instead of half the month earning no interest on the money in your transactional account, you stash your salary in the mortgage and use the money from there, and save yourself a ton in interest.

But, As I always say, there is a HUGE difference between how things worth mathematically, and how they work in practice.

I remember about 7 years ago having a discussion about this with a friend of mine.  We were talking about how she and her husband managed the money, and it was through the joint mortgage.  He’d put his salary in there, and because they both had access to it on their internet banking, she’d take it from there for the expenses.

The only problem was, when we did the audit, they’d actually used the big savings and bonus payments to keep their life going.  They were drawing more in total than they were making.  But, because of so many different ‘ins’ and ‘outs’, they had lost track of it.

As I was talking to her, something dropped in my stomach.  A resonance, a sense of knowing and dreading that in fact, if I dug deeply, that was happening to me.

So I went back and did the numbers… and over 4 years our wealth had stood still.  Technically, the bonuses, and even just the mortgage paydowns monthly meant that it should have been growing.  But what we hadn’t noticed, was that when everything goes through the homeloans, it all gets muddled together.  It’s more difficult to track and more difficult to see clearly the picture at a holistic perspective.

There is one clear rule:  NEVER use capital to fund expenses.  Only ever use income.

Your money becomes capital when you save it or invest it into something that should generate income or returns.  The biggest trap people fall into is that they keep using capital to fund emergencies or short falls in income, instead of cutting their expenses to match the season they’re in.

So, by using your homeloan, you end up muddling that whole concept, and find out, like the Linfield’s did, that you’ve spent 4 years going sideways.

What you should use for your emergency fund

The more money you have, the more interest you should earn.  And six months of expenses ends up being a lot of money.  So you may start with a separate savings account because you don’t have enough money for a higher earning interest account.

But, as you save up, keep checking if there’s an account with more interest you can earn now that you have a bigger balance.  Unfortunately I have yet to find a bank that proactively recommends you earn more interest.

So, most of my clients end up with a money market account… and they have to keep checking that they’re on the highest earning version of it – because banks, like product people, seem to move and change the interest rates and bring out a ‘new product’ with a better rate.

Because it’s for emergencies, you need to be able to access it to use in an emergency.  There’s no point in having your child needing a procedure in hospital but you need to give 32 days of notice on the product.

There are advanced strategies, but for now, make sure that you work to at least getting the maximum interest for the most flexibility at every level of saving.

So how long should it take you to get to six months of savings?

In my experience, it varies.  Anywhere from a year to four years for most people.

It all depends on how much stretch there is in your budget, whether you get bonuses you can put towards it, and how much you’re using to pay off debt or invest.

My personal recommendation is that even if you’re paying off debt you should STILL be saving or investing.  I’ve talked about that in Episode 169 – The controversial advice I give people in debt.  Then, a small amount goes into starting your emergency fund as it helps you to break the cycle of continuous debt.

And, if you’re not in debt, you should divide your money into saving for your emergency fund and starting investing.  Again, it helps so much to see both of those start growing.

But if money is tight, it may take four years.  I personally do plans for people on a four year time frame and they look at me as if I’m smoking my socks.  FOUR YEARS??????!!!!!  And it doesn’t matter which way I scrape it, that’s how long it takes.  But, once you have it, if it’s properly invested it will grow with a normal salary raise by itself, and you never have to save for it again.

And trust me, you will be so grateful you diligently saved a little bit each month towards it… so that along the way, or in five years time when an ‘unexpected’ expense happens, you will have that money available to use as you need.  But if you don’t start today, it will never be in place.

So friends, do it now.  Work out how much you can put aside each month towards your emergency fund, and set up an automated transfer from your salary account for the same day as your salary arrives.  Pay your future self first, and when you need it, you will be so grateful.

I’m Lisa Linfield, and this is working women’s wealth.

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Lisa Linfield

Lisa Linfield is on a God-given mission to free 1 million women from the weight and stress of money. She's a CFP, founder of a wealth management business, and podcast host of Working Women's Wealth

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