About Me

Monday, May 29, 2017

Emergency Funds When You Have Some Passive Income

I am a big advocate of Emergency Funds. Even a mini EF with USD 500.- can be very handy in case of an emergency and when you are low on cash.

A lot of people have difficulty in determining how much is good enough for a healthy Emergency Fund. This depends on a variety of factors such as the size of the household, one's age, the stability of income sources, whether there is some passive income and how much is available to earmark as Emergency Fund.

I have gradually built up my Emergency Fund from USD 1000.- to a very healthy level. I am on my own so, after I passed the USD 1,000.- Threshold, I have targeted to set aside at least three month's worth of expenses as my Emergency Fund. Once I achieved that, I targeted for more. Before I had some passive income, I was at one point, able to set aside a whole year's worth of expenses which was quiet an accomplishment.

Now that, I have some passive income, I have a smaller Emergency Fund, knowing that, there is a steady flow of money on a monthly basis.

I do not like to disclose my real numbers. So, let's say;

Monthly Expenses: USD 4,000 (This should include everything)
Rent Income: USD 750
SS Payment: USD 1,000
Monthly Deficit between Expenses and Passive Income: USD 2,250

Therefore, a healthy EF should be USD 2,250 x 12 = USD 27,000
If I did not have the passive income, I would have to try setting aside USD 48,000 as an EF.

Having an EF to cover a whole year's worth of expenses may be a little too much for some but at my age, finding a decent job with good pay is next to impossible. For younger people with a variety of skills, a three month EF may be sufficient.

You may argue that the rent is not a very stable source of passive income but, in my case, I would not have a hard time finding a new tenant in my rental property's area.

I am targeting to fully retire by January 2020 which is a little over 2,5 years away. What if I lose my job earlier than that? I will definitely try going back to consulting to see if I can pull in enough income without having to downsize. I would give this a try for at least a year.

If that doesn't work, I will definitely downsize. My apartment is already small but it is worth more than a larger apartment elsewhere and my monthly maintenance fees are high. I can easily buy two apartments at the location of my rental property if I sell this one. That way, I would create another source of rental income by renting one of the apartments and living in the other.

That means I would have to move out of Istanbul which is something I really do not want to do. So, we shall see what the future holds for me in a couple of years. I just gotta keep saving as much as I can, while I can.

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