(03) 9020 2905Sure, they come in degrees of seriousness, but they’re all emergencies. A good drama-queen can make an emergency out of anything!
Bar, 2.30am. You’re exceedingly intoxicated and have been acting like Dudley Moore in Arthur for several hours. Alas, without scoring. Pockets contain only coins. Hope you stashed an emergency $50 for the cab home. Where? Sock.
Pizza delivery dude rocks up. Need 20 dollars. Wallet is empty. Defer to emergency fund. Where? Coin jar? Back of the couch? No luck? Pretend you’re not home.
But while I don’t discount these as emergencies, I’m guessing we’re talking something more serious.
A true cash crunch occurs when there’s no income for an extended period. That’s most likely through unemployment or illness.
Your emergency fund should be about three months’ income, which will cover most, but not all, prolonged periods without income.
I personally tested this theory last year. I’m self-employed, but my business suffered a series of “one-off events”, which were completely beyond my control. As a result, our family suffered a severe cash crunch and we needed about two months’ of income as savings to get through it.
If you have a mortgage, you should hold this money in your redraw or offset accounts. Renters should use a high-interest online account.
When it comes to major accidents and illnesses (such as losing the use of limbs, heart attack, stroke and cancer), that’s what insurance is for.
Total and permanent disability, trauma and income protection insurance are designed to get you money quickly, so that health disasters don’t get compounded by financial disasters.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.