AN emergency fund refers to a financial safety net that protects against future unexpected expenses.

It’s often the case that an emergency fund is mistaken for the stashing away of funds for “a rainy day”. An emergency fund is necessary for any major unexpected expenses, such as job loss, major illness or any unexpected life event.

A “rainy day account”, meanwhile, is ideal for short crises and one-off expenses such as minor, unexpected car or home repairs. An emergency fund on the other hand deals with unexpected emergencies over an extended period of time. Having an emergency fund is important for financial well-being during times of significant financial difficulty.

DEBT AND OPPORTUNITIES

One important purpose of an emergency fund is debt avoidance. When an unexpected life event occurs your emergency fund can provide the cushion needed to weather the financial storms. Instead of resorting to credit cards and high-interest unsecured loans to cover expenses, your emergency fund ensures that your financial health remains in tact and you are not at risk of incurring ballooning debts.

Your emergency fund is also crucial if an unexpected opportunity arises. Without this emergency fund it may be difficult to grasp the opportunity of a special deal that comes your way. With a well-resourced emergency fund in place there is no need to disrupt long-term investments for current opportunities.

It is recommended that young adults start emergency funds in their 20s. This gives a head start in financial control and money management. The emergency fund helps to build assets and reduces the tendency to borrow.

THE CORONAVIRUS PANDEMIC AND YOUR EMERGENCY FUND

The ongoing pandemic brings into focus the stark reality of the importance of an emergency fund, especially for seniors who may have been forced to go on early retirement due to job loss or salary cuts. As the population ages, seniors are more susceptible to health challenges which can prove very costly. How much money do you need to have in an emergency fund? It has long been recommended that you should have three to six months of living expenses in an emergency fund, and this account should be reviewed and replenished periodically.

COVID-19 has revealed that funds to cover even three to six months of living expenses may be woefully short if you are out of a job for a year or more.

During the pandemic many people have depleted or significantly reduced their long-term investment to cover living expenses. With adequate emergency funds, one’s long- term investments can remain invested for future goals while any extended financial challenges in the short term can be addressed via savings from your emergency fund.

Seniors or pre-retirees should look at having up to 12 months of living expenses for emergencies. Retirees should plan to have to to three years of living expenses in an enerrgency fund.

INVESTMENT VEHICLES FOREMERGENCY FUNDS

Your emergency fund is your reserve account that is kept for long periods of economic drought or economic downturn. Funds saved for emergencies should be kept separated from your regular savings account and should be easily accessible. A high-yielding investment account is best to grow your emergency funds. Investing in a money market account or low-risk bonds will allow you to earn more on your investment than a typical savings account and will also provide the financial cushion that you need in times of crises. Inflation wages an invisible war against the purchasing power of your money over time. That is why it is necessary to keep your emergency fund in a separate account from your regular savings. Emergency funds should not be invested in stocks or exchange traded funds (ETF), which are subject to market volatility and liquidity risks.

If you do not have an emergency fund, now is a good time to start. Assess your monthly expenses, then set a goal as to how much you desire to have as emergency savings. Make regular monthly contributions to your account — it’s the consistency that matters. Examine your spending habits and seek ways to increase earnings.

Seniors and pre-retirees, be aware that when you are in retirement your money should not retire. Always have your money working for you. An expert financial advisor can assist you in growing your money.

Grace G McLean is a financial advisor at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit www.bpmfinancial.com. She is also a podcaster for Living Above Self (livingaboveself@gmail.com).