The great Roger Staubach, about to launch a Hail Mary. An emergency fund will mean you don't have to...
I received a call last week from a person I hadn’t heard from in quite a while. I was surprised to hear from him, but it wasn’t a courtesy call to see how things were, he was in trouble and he was looking for help.
This was his Hail Mary phone call.
The Hail Mary expression is used in American football and came into being over 40 years ago when the Dallas Cowboys quarterback, Roger Staubach, in a game against Minnesota, with 24 seconds left, had no other strategy left to play other than throwing the ball high in the air, near the Minnesota end zone, hoping one of his team mates would catch the ball. Luckily for the Cowboys, Staubach’s team mate, Drew Pearson did and they won the game.
Staubach, later admitted that when he threw the ball, he began saying a Hail Mary just as the ball left his hand. Now, this saying is used in many other situations to articulate a last gasp, desperate attempt to get something done.
The call I received, was this person’s last ditch, final attempt to solve a problem. And the problem was he had run out of money.
He was self-employed and had been for years. He had run a very successful company which provided him with an excellent standard of living but the last couple of years had been very hard. The business was haemorrhaging money and he had no choice but to stop trading. His only source of income therefore was gone.
The problem was, he had no savings to fall back on. He had no time to regroup and logically decide what his next steps were.
The mortgage was due in 10 days, his car loan in five and the money his brother gave him back in July to help him out was gone as well.
I knew from the sound of his voice, he was under severe pressure, and I would say he was a wreck both mentally and physically.
It’s obviously not good making decisions in that state of mind. You need time to think things through, rather than acting in an emotional way and making rash decisions you may later regret. But you can’t help it especially when there is nothing in your account.
Having an emergency fund in place would have helped this gentleman, without question. But he had none; rather than setting aside that rainy day money, he was putting it instead into his pension and towards a car loan.
Now, saving into a pension was an excellent thing for him to do, but he neglected and by-passed having cash reserves in place that he could access in the event of an emergency. There was no point saving into a fund he couldn’t access for 300 months if he didn’t have money he could access in one.
He would have been better reducing the amount he was saving into his pension, and divert some of it into his emergency fund. And when he had enough in place, go back to increasing his pension contributions.
I come across people all the time who don’t have any provisions in place to fall back on should they suffer a loss of income through redundancy, illness, or their business is no longer tenable. And there are, a number, of reasons why they don’t have one in place.
The first is pure neglect. Like the gentleman who called me, they don’t think they will ever need one. Their job is stable and their health is good so what could possibly happen?
A lot to be honest, and it isn't a case of if something will happen but when. Statistically it is claimed you have a 60% chance of suffering a financial shock in a calendar year.
If you are one of the lucky 40% then great, but don't take it for granted that this will always be the case, because it won't. It's only a matter of time before you'll need access to money quickly.
It is often bandied around that you need six months’ worth of your net monthly income in your emergency fund, but if you were to follow through on this, it would be very hard to save that amount of money - another reason why people don’t save for this eventuality.
For example, if you earned €3,000 per month, trying to accumulate €18,000 would be a very big ask. Trying to save that amount of money could take you quite a long time.
But for me, emergency money is not the same as the amount you earn each month.
What you are looking at building up in an emergency fund is based on needs only and not what you would typically spend on, a monthly basis. Get your expenses down as low as possible so the amount you have, to save isn’t as big as you thought it was.
You have to identify what those categories are that must be funded if you lose your income temporarily i.e. mortgage, rent, food, utilities, transport, insurances etc. and add them up, and that is your target amount.
For example, if out of that €3,000 income, the must haves amount to €1,600 then your target number is €8,000. It’s still a big number but it's less intimidating and more achievable.
But you have to make some sacrifices to be able to save and fund it and that's where a budget comes in, so start making yours today.
If you haven’t got that emergency fund in place, please do something about it. The peace of mind you will feel when you do, will leave you in a very positive place, safe in the knowledge you won't have to make that Hail Mary call, if something was to happen.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie