How to Start an Emergency Fund
Do you ever find yourself stressing about money? Does it cause you anxiety? Do you know what would happen if you suddenly lost your job, or if you had an unexpected expense costing thousands of pounds?
Wouldn’t it be great if there was a way to take almost all of that stress away? Well there is, and while it takes a fair bit of effort to set up, once it’s there, I’m positive your money worries will be significantly reduced.
In this episode we’re talking about the emergency fund — what it is, and how you can set one up.
So what is an emergency fund? An emergency fund is savings you have set aside that can be used to pay for emergency expenses. Some people might call it their savings for a rainy day.
Life is unpredictable and so often when things go wrong, money is needed. An emergency might be something like losing your job, your boiler going wrong, or your car getting written off — all of these things could require a large amount of money to see you through. Without an emergency fund in place, you might end up getting into debt in order to get by, but debt can seriously damage your financial future. The healthy approach is to have the money in place to enable you to weather these storms on your own terms.
Let’s talk about how much you should have in your emergency fund. If you have debt other than a mortgage, £1000 is a good place to start. Paying off that debt as quickly as possible should be a high priority, but having some kind of emergency fund in place is still important because it will help to stop you getting into more debt and taking a backwards step in your journey to financial freedom. £1000 might not cover everything, but it will be a decent buffer to protect against unexpected expenses dragging you down.
If you have no consumer debt, then you should aim to build an emergency fund that covers three to six months of living expenses. Should it be three months, six months, or somewhere in between? That’s up to you to decide based on your circumstances and how much uncertainty there is in your life. If you’re in a two income household and both have stable jobs, then three months should be fine. If you’re in a single income household, or are self employed, aim for six months. Also consider factors like the general state of your house if you’re a homeowner, and your health.
Once you’ve decided how many months of savings you want to have, converting that to a numerical target is simple if you already have a written budget. Take a look a look at your monthly budget total, subtract anything you’re regularly putting into savings as we’re only focused on expenses, then multiply that by the number of months you decided on.
Your emergency fund should be kept in an account that is always accessible. An instant access cash ISA or premium bonds could be a good fit for this, depending on your situation, as it’s quick and easy to get the money when you need it and the amount saved cannot decrease like it can with investments.
Now onto the hard part. Your target amount is likely to be a large amount relative to your income, so how on earth do you save up that kind of money?
The answer is to do it gradually and intentionally. Have the goal fixed in your sights, make it a high priority, but recognise that it will not happen over night. It might take years to reach your savings goal, but if you are intentional about it and make regular contributions each month, then you’ll get there. You can fast forward the process by using things like a bonus at work, taking a cheaper holiday one year, or selling what you don’t need. Get creative.
Building an emergency fund is hard work, but it is so worth it. Next time that wave of panic comes over you and you think “what if I lose my job” or “did the boiler just make a funny noise? what’s if it’s going wrong?”, you know you can rest easy because you’ve got it covered. Life can throw some pretty extreme events at you, but you don’t need to stress about your finances because your emergency fund will see you through. It is one of the best ways you can possibly take the stress out of your financial life.
I hope that’s been helpful. If you have any questions please get in touch. You can email us at email@example.com. Take care.