Europeans rarely make special preparation for financial emergencies. Some Europeans are savers – although Cypriots are not – and they save money in both good times and bad, and then rely on those savings for any emergencies that may arise.
But the pandemic, and the tremendous uncertainty that it threatens, might be a good time for Cypriots to start thinking about what might happen if you lose your job, can’t pay the mortgage, can’t meet expenses etc. If you have your own business, you’re probably struggling with boosting revenue; if you invest your funds, you should be thinking about market volatility.
Don’t forget about stuff like your car breaking down, or some medical expenses not covered by insurance.
So, you think that’s boring and obvious? Talking about this is rather like the boring lawyers who are always telling you to make a will – it only matters if you die and then your family money is tied up in court for a few years.
We live in “interesting times,” as the Chinese say, and that’s why preparing for trouble is prudent.
Just as we have experts on everything today, we have experts on preparing for financial emergencies. They propose systematic preparation for when times get tough.
Shang Saavedra is a Harvard graduate who achieved financial independence (starting from scratch) at 31. She proposes that we all create an emergency fund to help us in times 0f need.
“Do whatever it takes to get started!” Saavedra insists.
Most of us have trouble saving anything at all. But, in times like these, we have to make a special effort to put together this fund which could mean a lot if things go bad.
“A ‘do whatever it takes’ approach has proven to be a successful attitude for both myself and my clients,” she points out.
This means considering actions that you’ve probably never even thought about before. Saavedra suggests that those looking to boost their savings should consider:
- Selling everything you’re not currently using
- Take some jobs on the side that earn money quickly, like pet-sitting or helping a relative with accounts
- Pause all non-essential spending – and by ‘non-essential,’ she means just what you need to get by each day is all that comes out of your purse
- Put any extra money that comes in straight into the emergency fund – gifts, bonuses etc
In general, Saavedra recommends that savers set aside three to six months of expenses in an emergency fund. However, this may vary depending on each person’s individual situation.
For example, Saavedra says that it probably makes more sense for those with relatively stable jobs and no dependents to have a cushion of about three months’ expenses. Whereas those with children under the age of 18 will likely want to save six months’ worth of expenses to give them more peace of mind.
These funds should be placed in a bank account or other instrument which allows us ready access – we should separate this fund from our other savings which we should be placing at the best interest rate possible.
What about spending the emergency fund? “It’s best to have clear-cut rules about when you will dip into it,” warns another emergency-fund expert, Anna Sergunina, CEO of MainStreet Financial Planning.
Once you build up the fund, there is always the terrible temptation to spend it on those golf clubs you’ve always wanted to buy, or for a blender that’s on sale.
This is why Sergunina says that you agree with your family on rules for the kinds of emergency that the funds are to be spent on (this should not include “when I need a new pair of shoes,” but focus on really serious family needs).
So we should all go over our living expenses, pare them down to the bare minimum for a while, and build up this emergency fund. It may be boring, but it will get interesting if you need the money badly.