Learn how to build an emergency fund and protect yourself from the unexpected expenses that life can throw at you.
Since the recession hit the UK, credit card spending has soared; with charity National Debtline saying many are using credit rather than savings to cover emergencies.
Using credit cards if the roof falls in or you lose your job may seem an easy solution but it will hit your pocket in the long run.
The pain is doubled: you have to cover the emergency, then the interest on the debt. The answer? Start an emergency fund and pay off debt …..
What is an emergency fund?
An emergency fund (also called rainy-day fund) is money you set aside for unexpected expenses, such as boiler breaking down, car repair, losing your job, or for large unexpected expense.
Why you should have an emergency fund?
It is a good financial plan to keep a rainy-day fund in ash for life’s unexpected expenses.
Saving for a rainy day is simply about building a financial umbrella that protects you from the unexpected costs that life can throw at you. It will help you feel financially confident when disaster hits.
It also acts as a financial buffer, because without savings, an expected expense – even minor one – could set you back financially.
What sort of emergencies does it cover?
It’s important to understand what qualifies as an ‘emergency’. Major car repairs? YES. Mini break to Paris? NO.
An emergency fund is for unexpected expenses which drain your bank balance, like long-term illness, loss of job, accident, boiler breaking down or broken appliances.
This may sound like a fun-free way of using your savings but the relief you will feel knowing you can handle future crises? Priceless.
How much money should you have in an emergency fund?
If you have a lot consumer debt such as credit cards debts, store cards or car loan, I recommend saving a starter emergency fund of £1,000 first, then save a 1-Month emergency fund.
You can start small, try setting aside at least £500, but work your way up to 1-Months’ worth of living expenses.
The unpredictable environment we’re currently living in is a really good example of why a £1,000 emergency savings fund just doesn’t cut it any longer, especially if you were to lose your job.
If you lost your job or other main income tomorrow, you want enough cash to give you breathing space while you work out your next step. In the long-term, having enough to cover at least three months’ of living expenses is a useful benchmark, so work out your monthly income and multiply by three.
How do I build an emergency fund?
Let’s talk about how to build an emergency fund. After you’ve worked out how much you are going to save, start with a one-off cash injection of £500 – £1,000, if you have it, then set up a monthly direct debit for as much as you can manage until you reach your desired emergency fund.
If you’re lucky enough to find yourself with a lump sum of cash, such as a tax refund, bonus or redundancy pay – don’t get too excited – put it away as your initial savings.
If you do not have £500 or £1,000 to start with, you can start slowly and continue to save however small until you reach this amount.
Determine how much you can save and set up a regular transfer to your savings account on payday and you won’t have to think about it.
Even if you can’t save much, start with a percentage you can handle and increase it by 1% every month, quarter, or year.
Just start saving. Be realistic and work out a date you will hit your target and mark it on the calendar. This will help you stick to your fund.
The next step is to pay off debts. Remember you spend more on borrowing than you earn on saving so it makes sense to clear as much debt as you can before you start your building your fund above the 1-month mark.
Having at least £1,000 tucked away, will act as a buffer or shock absorber in the face of unexpected expenses whilst trying to pay off debts.
Where should I keep my emergency fund?
Following the banking crisis, you may be tempted to keep your money in an old sock under the mattress or in that trusty, if not rusty, biscuit tin at the back of the kitchen cupboard.
However, if your house burns down, that hard-saved fund would disappear in the blink of an eye (contents insurance only covers a small amount of cash).
Also if it’s under the bed you may find yourself ‘borrowing’ from it on your way out ‘window shopping’…
An easy access savings account with a high interest rate is the safest option. Your money will always be easily available and is covered by the Financial Services Compensation Scheme (FSCS) for up to £85,000 in the event of the bank failing.
How to Build An Emergency Fund – 5 Top Tips:
1. Make it liquid
It’s all very well saying ‘if the worst happens I can sell my house or car’ but these options take time you may not have.
Selling a house can take up to 10 weeks, leaving you without means to cover your emergency. So don’t tie your fund up in assets – make sure you can convert it into cash quickly.
2. Save the money in more than one location
Such as a few savings accounts with different banks. This will stop you from spending it in one go if you have the urge to use your fund for a non-emergency.
3. Open an account without a debit card
You need to have easy access to your emergency fund so don’t lock it up in Fort Knox. However, choosing an account that doesn’t come with a debit card will stop you from using your fund for everyday purchases.
4. Treat it like a bill
Set up a monthly direct debit to your emergency fund for as much as you can afford. Like all monthly payments you will soon forget about it.
5. Buy a grown-up piggy bank
According to a survey by Asda Money, the average family has around £530 in loose change lying around the house. Instead of flinging your change in a drawer – buy a piggy bank and get everyone to empty their pockets into it. It will soon add up.
Over to You…
Do you have an emergency fund and how did you build it build? Otherwise how do you plan to start funding your emergency fund? Let us know in the comment box below!
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