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In blogging, there are posts that we all sooner or later write. In personal finance blogging I reckon two posts that serve like a ‘rite of passage’ are ‘the latte/coffee post’ and the ’emergency fund’ one.

If you have read The Money Principle for any length of time you, my dear reader, know how I feel about received wisdom and mindless mantras: after all this is the blog where people are encouraged to think, question and find their own way. I did write a coffee post for another blog, true. But it was to tell people that they should give up their frappuccino because it is bad coffee, not because this will have any effect boycotting tax evading Starbucks.

As to emergency funds I have repeatedly mentioned that when we were paying off our debt it was THE emergency; and that now we have sufficiently high positive cash flow for small matters and savings can be accessed in dire straits. Tonight I changed my mind on the whole ’emergency fund’ thing. What happened?

I heard the story of a family who had nothing put aside (well, they moved recently after all). They went for a routine health check and it turned out that the bread-winner has a serious heart problem coupled with weight related issues. Unfortunately he drives for living and he won’t be able to do this for some time.

This got me thinking and as a consequence I changed my mind: one needs an emergency fund after all. But I still maintain that how large this is and how necessary it is to build it depends on individual circumstances.

When it is a matter of urgency to build an emergency fund? These are the three conditions under which saving and maintaining an emergency fund is an absolute necessity.

You are self employed

…or your job doesn’t come with benefits. Many will argue that having an emergency fund come handy if one loses their job. This, however, depends on your employer and the social security system in your country of residence. Many employers provide redundancy packages and although these are not always generous they are sufficient in the first instance.

It is much more important to have an emergency fund if you are self employed – business can vary from week to week and month to month. What is even worse you may need medical attention. When one is self-employed one either works, or they don’t get paid!

Message: If you are self employed and you don’t have an emergency fund start one; now! Sh*t happens and you have to be prepared.

You are the sole bread-winner

This is fairly self explanatory. The whole point of an emergency fund is to ‘hedge’ against loss of income or increase in spending. Having more than one income in a household partly does the job.

But when there is only one income coming in there is nothing to fall back on.

Message: If your household has only one income start an emergency fund! What are you waiting for?

You have no reliable support network

We all have to rely on our support networks from time to time – these give us courage and material support. Usually the members of your support network are close relatives and dedicated friends. John and I, for example, do act as an emergency fund to our grown up sons often (well, less often after we explained that the best thing we could do for them is to make sure they don’t have to look after us when we are old – we are very high maintenance).

If you moved recently, however, it is likely that your support networks are far away and there isn’t anybody around you could rely on in grave emergency; like being taken in hospital and your family is without your income.

Message: If you recently moved or don’t have strong support networks for some other reason, you can be in great trouble if you don’t have an emergency fund.

If you fall in one of these three categories, please do something about ensuring that you can survive for at least couple of months if trouble strikes. If you fall under more than one category – hurry; you may be in a really risky situation.

It is another matter how large this emergency fund should be and/or how you maintain it. This are matters for a different conversation.

Do you have an emergency fund and how large is it?

photo credit: Harshad Sharma via photopin cc