Peace of Mind

It's only money

I had a minor traffic accident the other day.

Well, I didn't, but someone else did and it might have been my fault. It ended up more expensive than we were thinking so we will probably claim on our insurance to pay for it.

​So far so normal, right?

The thing I was pleasantly surprised by was my reaction to the situation. Normally I am fairly careful with my spending, thinking about just how much pleasure, happiness, or utility something is going to give me before pulling out my wallet.

Not this time.

This time I was happy to have the option to make the problem go away by using some of my emergency fund savings. A few years ago this same problem would have been stressful, as I didn't have cash sitting around in the bank waiting to be mobilized.

This is the power of the emergency fund. Ideally you should have enough cash (or access to cash at short notice) to deal with unexpected expenses, be they traffic accidents, health issues, sudden flights to deal with family issues, or family/friends needing assistance.

How much cash to keep on hand is up to you. I have a couple of months living expenses in the bank, but my wife has her own business and that also has cash reserves we could tap in a larger emergency.

Saving a large proportion of your income is another kind of emergency fund. If you regularly save 30%, 40%, 50% or more of your pay, any time you have an unexpected expense you can just use the savings from that month to deal with it. You won't need to touch your investments or borrow money.

Finally, having access to credit (from credit cards, overdrafts, or lines of credit), provided you can pay them off quickly and easily, is another way to avoid keeping large amounts of cash but still making sure you can deal with emergencies.

You may find you need more or less than I do. The point is to have the cash on hand when you need it.

Another type of emergency fund is having some cash at home or your place of work. During the big earthquake in 2011 we had no way of getting money when the power was out (no ATMs or credit cards) so having a small stash of 50,000-100,000 yen would be invaluable during natural disasters.

How about you? What's your emergency fund policy? Do you keep cash at home?

This post first ran on RetireJapan in November 2016