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The Emergency Fund: Your Financial Safety Net
In today’s unpredictable world, having an emergency fund is more crucial than ever. An emergency fund acts as a financial safety net, providing you with the peace of mind that comes from knowing you can handle unexpected expenses without derailing your financial goals. Whether it’s a sudden medical bill, car repairs, divorce, lawsuit, or a job loss, having funds set aside can help you navigate these challenges without resorting to credit cards or loans that can lead to further financial strain.
You should ‘break the glass’ ONLY when a major unexpected event happens. We know this kind of events could be already hard to go through, and you do not want to make it harder because of lack of money.
Creating this fund will allow you sleep well at night and help you as well overcoming your fear of investing. As you know you have your back covered, you will have more freedom and peace of mind to allocate your remaining savings in a more fruitful (and probably riskier) investments (such stocks, real estate, etc.).
How much to save in your Emergency Fund?
As the French social system already provides a good protection against unemployment and health issues, a common recommendation is to set aside three to six months’ worth of living expenses. This amount provides a sufficient buffer to cover your essential costs, such as housing, utilities, food, and transportation, during a financial crisis or to cover an unexpected expense.
However, the exact amount may vary based on your personal circumstances, including your job stability, health, and any dependents you may have. It’s important to assess your own situation and determine what feels right for you.
How to build an Emergency Fund?
Establishing your emergency fund doesn’t have to happen overnight. Start by setting a monthly savings goal that aligns with your budget. Even small contributions can add up over time. Consider automating your savings by setting up a direct deposit from your paycheck into a separate savings account designated for emergencies. This way, you’re less likely to be tempted to spend that money, and you’ll be building your fund without even thinking about it.
It might be a good idea to fill up your Emergency Fund once you have paid back you ‘bad credit’ (credit cards, consumption credit) and before investing in risky assets (such as Crypto, or Stock market).
Where to save your Emergency Fund?
When it comes to choosing the right account for your emergency fund, look for a high-yield savings account that offers easy access to your funds. While you want your money to be readily available in case of emergencies, it’s also beneficial to earn some interest on your savings. Avoid tying your emergency funds up in investments that may fluctuate in value or have withdrawal penalties, as the goal is to ensure quick access to cash when you need it most. In France, you have multiple savings account with interesting rates.
Emergency fund golden rules
These are our ‘golden rules’ when it comes to manage an emergency fund:
- The amount of an emergency fund should be minimum 3 and maximum 6 months of your expenses. Having less than 3 months could be too low and not enough to cover a major event. Having more than 6 months could be too much and you will be missing other attractive investment opportunities.
- It should be in savings or checking accounts (high liquidity and availability). You should not consider as ’emergency fund’ locked investments like the PEE, or real estate, or any other investment product where you cannot have your money in matter of hours, or if even if available, it may not has reached its maturity level. A good example will be stocks. Yes, you can sell it online, but considering its volatility, you may be forced to sell low. Imagine you lose your job due to an economic crisis. The stocks will be low, and you could be forced to sell losing. Not ideal!
- Emergency funds must not be used for other purposes. A trick to avoid being tempted to use that money incorrectly, could be to write down in advance the valid emergency events.
- You should reach your emergency fund target amount BEFORE doing any investment. First things first!
myFrenchMoney tip: Use your CB as Emergency Fund!
You can negotiate with your bank to get a kind of credit related to your debit card (Carte Bleu) which is called 'decouvert'. Meaning that it will allow you to get in negative balance. You can negotiate the interest rate and the max. amount. By doing this, you can minimize your 'emergency fund' and free up cash to invest in other assets such as the stock market.
Our experience
We use our Livret A as the recipient of our Emergency Fund. It is considering its risk level (guaranteed by French government) and the interest rate. You can use as well the LDDS savings account. Check our blog about special savings accounts in France for more.
At the beginning of our journey in France, we automated our contribution to our emergency fund. We defined a monthly automatic transfer from our current account to our ‘Livret A’ savings account until we have reached our objective.
Conclusion and final thoughts
Finally, remember that your emergency fund is not a static entity. Life circumstances change, and your fund should reflect those changes. Regularly reassess your savings goals, especially after major life events such as a new job, a move, or the addition of a family member. Keeping your emergency fund adequately funded will help you maintain your financial stability and give you the confidence to face whatever life throws your way. Building and maintaining an emergency fund is a vital step toward achieving long-term financial health and security.
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Please remember that we are not financial advisors. We are just sharing our best understanding based in our own experience. This blog is for educational purposes only. Do not make investment decisions solely based on what you read in this blog. What works for us, may not for you. Do your own research and look for professional service if required. Read our full disclaimer in the ‘about’ page.
