Updated: Mar 20
It seems like the only thing anyone talks about at the moment is the Covid-19 coronavirus. On top of the health crisis there is also a serious economic crisis that is going to hit a lot of people's pockets very hard. And that's putting it lightly.
What should you do be doing with any money now? The same thing that you should have been doing a long time ago if you haven't already done so.
Building an emergency fund.
How much do I need in my emergency fund?
A good rule of thumb is three to six months of expenses. Some people advocate for even longer, like twelve months.
For this exercise, when I say expense, I mean necessities, so don't include coffee, eating out, and subscription services like Netflix. Stick to rent, loan repayments, groceries, insurance, utilities, etc.
If you are someone that does not have job stability or consider your situation to be on the risky side of the spectrum, then aim for an emergency fund that will cover your expenses for a longer time.
How do I work out my expenses?
The easiest way to do it through an automatic expense tracker. My personal favourites are MoneyBrilliant and Pocketbook. If you don't trust these automatic services, then you will probably need to rely on transaction histories available through internet banking and doing the calculations yourself. Whichever method you choose, you will find expenses will fluctuate, so work out your average weekly or monthly expenses and multiply it out to work out your savings goal.
How much of my income should I allocate towards my emergency fund?
I generally recommend putting away at least 10% of your income every week, although if you have excess income, don't just feel free to use anything over that 10% on spending money. Building an emergency fund should be the priority, not takeaway coffee.
When times are good, we sometimes think that they will always be good. But the best time to prepare for the hard times is during the good times.
Do I build an emergency fund before paying off debt?
The emergency fund should be prioritised ahead of paying off debt. If you have the means, then allocate 10% of your income to building an emergency fund, and then any spare amount over can go towards paying off debt.