Start Here and Never Stop
There is a good reason that almost all personal finance advice starts with ‘save up an emergency fund’. Not having some cash set aside for emergencies puts you in a very vulnerable position.
It’s like not wearing a seat belt when you drive.
Why do you need an emergency fund?
To protect you from unexpected expenses. Things like a car needing repairs, your boiler breaking, medical treatment, needing to take time off work, having to fly back to your home country at short notice.
I have had to deal with all of these living in Japan, and having a decent emergency fund is the difference between dealing with the stressful thing and dealing with the stressful thing while panicking about how you are going to pay for it.
An emergency fund is like a get out of jail free card. It doesn’t solve your problems, but it makes them much easier to deal with.
Not having one means running the risk of needing to go into debt to deal with emergencies, or not being able to deal with them.
How to save up an emergency fund
Many people have trouble saving up an emergency fund.
They plan to save the money they have left over at the end of the month, but when they get there there isn’t any money left over.
This is the wrong way to look at it.
Building a saving habit is less about money than it is about mindset.
I used to be terrible with money. My first couple of years in Japan I would spend my entire paycheck each month, and often have to borrow money from friends in order to get to the next pay day.
Needless to say, I had no savings.
The thing that worked for me was to treat saving as a bill, one that I paid first.
As soon as I got paid each month I put some money into a separate bank account.
I started with a small amount (3,000 yen a month) but slowly increased it over time.
After a while you get used to not having that money and after a while it becomes a habit.
Within a couple of years I was saving 50,000 yen a month.
How much money do you need in your emergency fund?
That depends on your situation. Do you have dependents? Is your job stable? How much money do you need to live on per month?
Most people recommend 3-6 months’ worth of living expenses.
Pick a number at the lower end of that range and see how quickly you can get to it.
Once you reach the target, don’t stop saving!
Instead you can move some or all of your monthly saving to investing. As you are already used to saving that amount every month, you won’t miss it.
You can open a NISA account or start paying into iDeCo. These are both great ways to start investing in a tax-advantaged manner*
*US citizens may not be able to use NISA/iDeCo because of US tax laws and regulations
Important topic and good, sensible advice.
The video is a bit difficult to watch, especially the beginning. There is something going on with your auto-focus on your phone (?), I think.
Ah, yes. Need to play with the autofocus settings there!
I actually don’t believe in the idea of a specific “emergency fund” held in cash. While I do keep some cash around for regular expenses, if I need more cash I can sell investments / take a 401k loan / etc.
Fair enough! It’s a personal decision everyone needs to make for themselves. Some people plan to use credit cards as a short-term fix, others to tap a home loan.
Having a very high savings rate (50%+) can also serve the same function as a cash fund.
However, for most people I would recommend just having some cash. It is the simplest and most effective option.