No Emergency Fund in this Emergency – Didn’t earn enough or spent too much?

An emergency fund is between 1-6 months of expenses, in a readily accessible non-volatile account, like a high interest savings account. It is for those rainy days and guess what, it’s raining. If you don’t have an emergency fund, I encourage you to take a moment to answer this question honestly for yourself – is it because I didn’t earn enough or because I spent too much?

A year ago, I was in lifestyle debt as I started Project FIRE40. Now I have over 6 months of expenses in a bank account. This is not to gloat, as after 10 years of working, I still needed a credit card (or three) each month, which is quite a sobering thought.

I built my emergency fund rapidly by working 3-4 jobs for 3-6 months, in the time clearing down my debt and buying a car. But the real key was not the jobs (that just made it quicker), it was reducing my expenses. Reducing my lifestyle expenses in particular as I move through the gateways to Financial Independence.

This has not only reduced my personal finance anxiety, but also many others, as I am not red-lining my salary every month, I am able to support those in more vulnerable economic situations.

A vast oversimplification for this exercise, but my working assumption is that if you earn more than R15k per household + R5k per additional person, then you can afford to save, at least something. In fact, I think I’m being generous. I’ve heard anecdotes of people getting a R400 weekly grant, who save R20 of that.

Once the emergency fund is in place, this R20 saving can be invested. Over 40 years at 9%*, that weekly R20 can be grown to R380,000, stepping it up to R200 a week, which is one take-out a week for two or 1-2 evenings less of drinking and it compounds to R3.8m.

Using the 4% rule, that is R12.7k per month, for life. So cutting back on a restaurant meal for two each week (R400ish), would mean a compounded amount of R7.6m or R25k per month. All in today’s money.

But the first layer of a financial plan should generally be an emergency fund and my hope is that those that earn enough to save and can’t pay rent after less than a month of disruption take this opportunity to evaluate how and what they spend their money on.

What is important. What is not. My hope is that people consider how small changes can make a fundamental difference.

For those not earning enough, it is tougher and for some there are options to make yourself more valuable by developing career capital, but that is for another post.

My hope is that the anxiety being felt right now is the trigger needed. A strong motivator of not wanting to be in this situation again. A trigger to take control of your financial life on the road to Financial Independence.

*I haven’t check this figure, but one article I read said that in 2014, the JSE’s 25 year real (after inflation) return was 9%.

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