The Mighty emergency account: 3 rules you need to know
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How many of us found out for the first time during the Covid hot mess that we were, in fact, living from paycheck to paycheck?
One of my favorite financial principles that can really save one a headache if anything happens is the Mighty emergency account. Having money stashed away somewhere when the unplanned happens is one way you can keep your grip on your finances.
An emergency, according to Cambridge.org, is “something dangerous or serious, such as an accident that happens suddenly or unexpectedly and needs fast action to avoid harmful results”. I enjoy this definition as it highlights two critical aspects of how people find themselves in financial troubles.
The first is that an emergency happens suddenly or unexpectedly, and second, it needs fast action. This is where the Mighty emergency account steps in as a principle to save the day. The beauty of this is that you and I have complete control of it. So long as we follow the basics of what an emergency account is meant to look like, we will be okay. Covid-19 is one of those incidents that happened suddenly, and not a single one of us was prepared for it. But if you had a fully-funded emergency account, financially you may have been okay.
The benchmark is to have three to six months’ worth of income set aside for living expenses. Let me explain why it is precisely for living expenses. The financial sector and all its brilliant people generally have insurance products that can respond adequately to any emergency incident that may happen to any other assets you possess. For example, you bump your car, and the damage needs to be attended to. Your car insurance policy is available.
If you accidentally drop a glass of champagne on your laptop and incur water damage, your insurance policy can pay for a replacement. If you are retrenched and cannot pay for your home loan or other form of credit, credit life insurance will help pay for them as long as you’re unable to. Most potential losses have been carefully studied, and a financial response is available. But the way we live our lives is a little different from one person to the other – there is no way to measure the extent for each of us. Where the financial sector doesn’t have an adequate response, they offer a principle: emergency savings.
Our emergency funds will look different because we all have differing needs. But also because it takes time to build an emergency fund. Starting small is usually where most of us can really begin. Work out how much you would need monthly to pay for your modest living expenses if your salary were to be cut or you were to totally lose your income. Then work out a savings plan to start stashing that money away.
The best emergency fund accounts follow the same rules: they are fully funded, accessible, and saved in an interest-bearing account.
- Fully funded. The goal is to have a fully-funded emergency account. As said before, there is an industry benchmark of three to six months’ income, but if you are a freelancer like me, especially in the media space, then even 12 months is not being dramatic. The secret is making sure that we put the money where it grows
- Accessible. An emergency happens unexpectedly, and a lack of response to it could potentially exacerbate the situation. This is why money in an emergency fund must be liquid and easily accessible. This sometimes poses a problem for anyone lacking in the discipline department. It helps to draft a document for yourself stating what an emergency is for you and when you can dip into that account for financial assistance.
- Interest-bearing account. A big pain point for those who are anti emergency fund accounts is the facility itself. They cite that three to six months’ worth of living expenses is often a substantial amount that should be working to make you more money rather than sitting waiting for an emergency. Shop around for an interest-bearing account that gives you access to your funds but still gives you a return above inflation.
Having an emergency account may not make you wealthy. Look, it probably won’t cure other questionable financial habits we may have, but it will give you a much-needed buffer when an interruption in your income happens. For that, we definitely give it a capital M (“Mighty”).