Emergency Fund

Investment moats article on Emergency funds have some good tips.

A good set of emergency fund target can be as such:

• $500: Your initial sum of emergency funds. This helps you resolve budgeting problems when you spend too much, mostly due to yourself still learning the right level to allocate to various categories
• $1000: This sum should cover a sizeable portion of your expenses and much monthly emergencies. This should be built up before paying down your debts, so that in the event of emergencies you do not need to borrow again.
• 1 month living expenses: This is where you would like to reach, where you can effectively live on your last month’s income. So you will spend last month’s income, then this month’s income will be use to buffer this month’s spending, with majority of your income allocated to next month’s spending
• 3 months living expenses: By the time you reach this stage, you have achieve what the text books have recommended. This should take care of smaller unemployment, usually during an unsatisfactory job position in a good job market.
• 6 months of living expenses or 3 months of disposable income: This level  should buffer you against a prolong unemployment in a down market. However, in certain countries, it may be more difficult to find a job within this time frame.
• 1 year worth of living expenses: By this point you will have ample buffer to take most emergency within your stride even some of those living expenses and relative emergency hospitalization. At this point you might even be able to simulate whether your family can quit your job and live off your income generated by investments

Emergency funds is important, but even when the sum is small, they can be vital in helping you organize your financial situation well. Its important not to give up even if its difficult to build up to 1 month of living expenses.

However, I have some recommendations.

For the first month when you start work, or when you want to get your house in order, don’t pay off the majority of your debt. Pay the minimum. At the same time, don’t put any amount to wealth building.

The rationale is that, it does not make much of a difference if you delay your wealth building or paying off debts by 1 month (unless your debts is from loan shark and the interest is 20% per month!). However, you gain a notable magnitude of flexibility if you manage to build up a small emergency fund.

To buy into this personal finance helps reshape you world and to improve your life, you have to stick to it, and I see this emergency fund to be integral to it.

Imagine you overspend, makes some mistakes in the early stage of your budgeting, the only way you can gain flexibility is through credit card borrowing.

This is going to put a dent to your confidence.

1. Cut your expenses,pay minimum on your debt financing, take on a little bit more jobs to free up $500 for your first emergency fund.
2. For the next 1 year, put away $40 per month, to build up another $500 so that your emergency funds grow to $1000. Target is to clear your debts by channelling more to pay down your debts.
3. When it comes time to collect your bonus, before spending, look to see if you can free up another $1000-$2000 to emergency funds, or even 1 month of your normal monthly salary. We cannot find a better opportunity to gain a sizable amount of money without affecting your monthly expenses constraint
4. Look to see if you can up the monthly build up of emergency fund to $80 per month

In this way it is possible to build up roughly $6000 or 3-4 months of your expenses as emergency funds.After this you can continue to fund $80 per month so that yearly your emergency fund will slowly build up to $10,000 at least in 10 years.