Digital nomadism is no longer just a trend. Instead, it’s a viable lifestyle that offers ultimate freedom and flexibility. But with great freedom comes great financial responsibility.
Exactly what that responsibility looks like means changes from person to person. For an Aussie nomad, that might mean consulting with a reputable Sydney tax accountant, while an American might focus more on putting aside extra for healthcare expenses.
Both, however, need to feel secure while maintaining an adventurous (and, at times, uncertain) lifestyle. So, how do they do it?
Here, we’ll break down the key factors to consider when calculating your emergency fund, and we’ll provide a practical formula to help you determine the right amount.
Why Digital Nomads Need an Emergency Fund
Being a digital nomad means embracing unpredictability. Your income may fluctuate due to freelancing or gig work. You could face unexpected travel expenses, medical emergencies in foreign countries, or even issues with clients failing to pay on time.
Without a financial cushion, these challenges can quickly derail your journey. An emergency fund ensures that you can cover unexpected costs without relying on high-interest loans or credit cards.
It also provides peace of mind, allowing you to focus on your work and experiences rather than worrying about how you’ll handle a financial crisis.
Key Factors to Consider
Monthly Expenses
Start by calculating your average monthly expenses. This includes housing, food, transportation, insurance and subscriptions. Don’t forget irregular costs like visas or flights.
Location Stability
Are you staying in one country for an extended period, or are you constantly on the move? Some destinations have a higher cost of living, while others offer a more affordable lifestyle, so you’ll want to adjust your savings goal based on where you’re planning to spend your time.
Income Stability
Evaluate how steady your income is. Do you have recurring clients or retainers, or is your income project-based and variable? If your income is less predictable, you’ll need a larger emergency fund.
Healthcare Access
Medical emergencies can be costly, especially if you’re in a country where healthcare isn’t easily accessible or affordable. Make sure to account for travel insurance or private healthcare coverage in your calculations.
For expert financial guidance, consider consulting a tax accountant. They can help you navigate tax obligations, ensure compliance and identify ways to maximize savings, giving you a clearer picture of your financial health as a nomad.
The Emergency Fund Formula for Digital Nomads
A general rule of thumb is to save three to six months’ worth of expenses. For digital nomads, however, this formula might need some adjustments due to unique factors like travel costs and fluctuating income.
Here’s a more tailored formula:
Emergency Fund = (Monthly Expenses x 3 to 6 months) + One-Time Costs + Buffer for Income Variability
- Monthly Expenses: This is your average monthly spending.
- One-Time Costs: Include costs like emergency flights, visa renewals, or medical treatments.
- Buffer for Income Variability: Add 10-20% of your monthly income to account for any gaps or delays in receiving payments.
For example, let’s say your average monthly expenses are $2,000, one-time emergency costs are estimated at $3,000, and you want a 10% income variability buffer. Your emergency fund would look like this:
($2,000 x 6 months) + $3,000 + ($2,000 x 0.10 x 6 months) = $16,200
This amount ensures that you’re prepared for six months of living expenses, a potential emergency, and the unpredictability of freelance income.
Build Your Financial Safety Net
The digital nomad lifestyle is exciting, but it’s not without risks. Building and maintaining a robust emergency fund is the best way to safeguard yourself against the inevitable challenges that come with this adventurous way of life.