You’ve probably heard people say you should build up an emergency fund before investing, and they’re right.
But how much is enough?
The reason an emergency fund comes first, is because it means your investments can stay there for the long-term.
An unexpected expense, won’t force you to sell investments, at time you might want to avoid (like a market crash).
The right size emergency fund is a very personal decision, there’s no rule of thumb that applies to everyone.
If you lost your job tomorrow….?
This is a good starting point, because exactly the type of scenario, that you might need your emergency fund to cover.
If you were suddenly unemployed tomorrow, how many months would it take you to find another job?
This number might change over time, depending on how things are going within your industry.
For some people it could be 2 months, others 6-12 months.
Now you know how many months of expenditure you need to cover, let’s look at the monthly costs you need to cover.
What are the absolute essentials that you can’t go without, and are covered by your salary?
Not everything you spend on a monthly basis, but the things that really matter. The absolute non-negotiables.
Things like:
- School fees
- Grocery shopping
- Rent or mortgage payments
- Minimum loan or credit card payments
- Insurance costs (medical / life / property)
Add these up, and multiply them by the number of months you think it would take to find a new role.
This gives you a starting value for your emergency fund.
What’s else could go wrong?
Chances are, more than one bad thing will happen at once – or you certainly want to be prepared for that.
Adding on a buffer for things beyond living costs, can give you some extra breathing room.
On top of monthly living costs, what else could happen that might need immediate attention whilst unemployed?
Things like:
- Your car breaking down?
- Your rent increasing by 10%?
- A broken boiler, or leaking roof?
- An emergency flight home, for you and your family?
- A visit to the dentist, that your health insurance doesn’t cover?
Pick the most expensive one you can think of, and add a buffer for these costs, on to the number you have so far.
Expats – what’s the worst that could happen?
Living away from your home country, makes things more complicated, because you might have a limited amount of time you’re allowed to stay whilst unemployed.
What if you couldn’t find another role in your city or country, what if that meant moving?
You might also want to add on some extra, considering how much it would cost if you had to relocate:
- Moving/shipping costs?
- Flights and new visas for your family?
- Penalties for ending a rental contract early?
Are these more expensive than the buffer you’ve already added on to monthly costs? If so, you might want to increase it.
Would moving elsewhere means selling a car or property that’s financed?
You could even consider adding on a margin, if the money you’d get from selling cars or properties, might not cover the full value the loan you need to repay.
For large debts, again this might depend on how concerned you are about the future.
What about end of service/severance pay?
Most people get something when they leave an employer – but it’s best to see it as a bonus.
There’s a chance that your employer might not come through on their promises.
If the company enters liquidation, or has a history of avoiding payouts, it could be a problem.
Framing it this way, as a bonus, any extra money you receive, gives you additional time to get back on track.
Rather than something you’re relying on, which might not happen.
Where should you keep your emergency fund?
It needs to be accessible, or at least some of it does.
If you have a large amount, you could split it between an instant access savings account and something less liquid.
Personally, I keep around £10,000 in a savings account. Anything beyond this I keep in a 3 month notice account.
This allows me instant access to some funds, but they earn little interest. Anything I might need further down the line, gets a higher level of interest, and I can access the funds after giving 3 months of notice to the bank.
Do I have to save all this money before I do anything else?
Whilst prudent, you don’t have to build up 100% of your emergency fund before doing anything else. But it is important it’s growing in size.
Many expats are also looking to pay off debts, or invest.
If you’re looking to build a sizeable emergency fund, but very confident in your employment, you could commit to adding 50% of your savings to an emergency fund, and the other 50% to investing or paying off debts.
That way you’re achieving both goals over time, rather than missing out on one entirely.
Once you reach the target amount of emergency savings, you can stop adding to your cash.
Why is too big on an emergency fund a problem?
Now you know how much you need, it’s important to make sure you don’t have money sat in cash, that could be better used elsewhere.
Over the long-run cash savings have grown less than rising living costs – the value of cash in real terms, gets eaten by inflation over time.
Your emergency fund, is money you can’t afford to take the risk of investment volatility with, so we have to accept the risk that it will be impacted by inflation.
But for money you don’t need for many years, it’s imperative that it’s growing in real (after inflation) terms.
Once you’ve got potential emergencies covered, you’re better investing cash for future growth.
For many international expats, an Offshore Investment Account is a great solution.
Want to understand how your wealth can support your future?
If you’re an expat with over £150,000 to invest, arrange your complimentary initial consultation today.
