Finding Your Emergency Fund

Ok, so this was going to be just an extra bit on the end of last week’s blog but as I’d promised to keep the blog to just 250-500 words a week this had to be given its own post. So, finding your Emergency Fund which should be 3 to 6 months expenses. Having an Emergency Fund will give you a degree of financial security which many people do not have, it will also enable to you avoid the credit card trap; living hand to mouth and enable you to provide for your future retirement, kid’s college fees or wedding.

So first you need to know how much 6 months expenses actually amounts to. To do this you need to create a family budget calendar. This lists all of your expenses over the year. If you have a computer with a spread sheet programme this is the easiest method of creating a family budget calendar. With the fist column entitled ‘expenses’, the subsequent 12 columns each month ‘Jan’, ‘Feb’, ‘Mar’ etc. and the final column ‘Total’

Under ‘expenses’ list all of your annual expenses: rent, mortgage, school fees, medical insurance, holidays, utilities (DEWA), mobile bill, holidays, spending money, groceries, car expenses (insurance, petrol, repairs), other travel expenses, credit cards, bank loans and any other items. Enter the amounts you spend on each item in each month and total the figure at the end of each row giving you a total annual expense on the item. You can change this as time goes on when you have actual records rather than these estimates but firstly estimates will do.

When you have entered all items of expenditure and totalled them, you should make a grand total at the bottom right hand corner under all of the totals column. This is your Grand Total Expenditure (GTE) and half of this figure is your target Emergency Fund.

Now we know what the target figure is, we need to find out how you are going to achieve this. Using the same budget calendar, add a further series of rows for each source of income you have: salary, rental income, dividends, interest etc. Using the same method as above, total these figures to arrive at a Grand Total Income (GTI.) Here’s what the first 3 months should look like:

Type Item Jan Feb Mar
Expenses Rent / Mortgage
Contents Insurance
Life Assurance
Car Loan / Hire
Mobile / Internet
Social Spending
Credit Cards
Kids Pocket Money
Total Expenses (GTE)
Income Salary
Total Income [GTI)

Now deduct GTE from GTI. If this figure is negative, you have a problem as you are spending more than you are earning. Ultimately this will result in bankruptcy as you will run out of assets and lines of credit. So if this is the case you need to check you sums and the figures you are using in the expenses section. If they are correct you need to make some economies in your expenditure.

Ideally, you should not spend more than 80% of your income. So if your GTI is 100,000 per annum your GTE should not be more than 80,000 per annum. Unless you have a positive figure when you deduct GTE from GTI you will never be able to have an Emergency Fund or make any further financial planning arrangements for your financial security.

It takes will-power to live to a budget. It is very easy to give in and ‘put it on the card’ but ultimately as we all know, this is a false economy. It probably takes around 6 months for someone to get into the habit of saving and for a reasonable amount to have been saved up. Once there is a decent sum built up the impulse to spend it reduces as the effort taken to save it is known.

You should save the money in a separate bank account away from your normal banking arrangements. This makes it a little harder to get to and you can clearly identify your progress as time goes on. Unfortunately, interest rates are very low (or zero) at present but this is no excuse for not saving.

If you would like a copy of a family budget planner let me know and I will e-mail a copy to you.