Emergency Fund – Why it’s Important?
An emergency fund is exactly what it says on the tin – it’s an EMERGENCY fund. For emergencies.
It’s money you put away for a rainy day, whether that be in case your roof has literally collapsed, your car has decided to break down, or you have lost your job. It should not be touched unless it’s for an emergency – got it?
Worryingly, in 2019, a study posted by the Independent found that 28% of Brits have no savings at all and only 40% of Americans could afford an unexpected $1000 cost.
How much Should I Save?
This is totally dependent on your financial situation and your expenses. In short you should aim to save 3-6 months of your salary for unexpected costs and events.
Some financial experts also say that 3-6 months is not enough and you should aim to save around 12 months of your salary as an emergency fund as this would cover you losing your job.
Now for most people, saving 12 months of their salary for just an emergency fund sounds scary and unrealistic. But this is why the amount you save should depend on your own situation. A good rule is to save at least 3-6 months of your salary over a few years as it means you will be covered for all events.
The best way to stay out of debt is by putting yourself in a situation where you can’t enter the debt cycle – an emergency fund is that debt blocker.
What Counts As An Emergency?
To make this easy – we’ve done it for you. It can be very tempting to think “I need a holiday” counts as an emergency as “I’ve worked hard all year”. Well that’s good – you’ve worked hard and saved, but the emergency fund isn’t to fund your travel.
As previously mentioned, financial emergencies are unexpected expenses that require you to use money immediately.
Here are a few examples of what counts as a financial emergencies and where it would make sense to use your fund.
- Job loss – short or long term unemployed
- Unexpected medical expenses to maintain your health – Not covered by NHS, Insurance or going private for immediate care.
- Sudden unexpected car breakdown or accident
- Sudden unexpected problem with a major system in an owned house such as an boiler, roof or electrical system
- A family member gets hurt and you need to take time off work to provide necessary care
Where To Save Your Emergency Fund?
As mentioned in a previous article, the key is to be able to access your emergency fund ASAP and also it would be nice to be earning interest on it.
In order to do so, the only real way is to be putting it in a cash ISA (more on that here), where you can keep the money saved up and have it easily accessible whilst also earning a little interest on top of it.
You will need to pick the correct savings account for yourself, but one that allows you to withdraw, and add to the account an unlimited amount of times is one that would make sense for your fund.
Why Emergency Funds Work?
The reason why emergency funds work is that it keeps you out of debt. It’s the whole reason to have that insurance so you don’t have to borrow at ridiculous rates and cost yourself any more money than you need to spend.
Money Service Advice put together a table that illustrates the main expenses that people have encountered and what really strikes to the core of is exactly why everyone needs an emergency fund.
Below is the table:
|Expense||Percentage of people who experienced this expense in the last 12 months||Mean average cost|
|Car repair or replacement||29%||£1,341|
|Opticians or glasses cost||15%||£195|
|Vet bills or pet costs||14%||£248|
|Lending to family or friends||12%||£2,482|
|Emergency dentist bills||11%||£285|
|Emergency home repairs||10%||£607|
|Children costs, like school trips and replacement clothes||9%||£224|
|Mobile phone breakdown||8%||£120|
|Boiler repair or replacement||8%||£973|
|Unscheduled events and weddings||7%||£423|
|None of these||29%|
How To Start Saving?
The key to building your emergency fund is by starting small and being realistic. Although in a perfect world it would be brilliant to save 3-6 months of your income, in 3-6 months – realistically that is never going to happen.
A good method to implement here is budgeting, and seeing what extra money you have left over. One way you might go about this could be using a money rounding app, where your spending is automatically rounded up to the nearest pound amount – and the change is added to a savings pot. This way, you can manage your savings build up using a system that requires very little effort.
Alternatively, you can set a fixed amount and make it transfer automatically per day, week, or month. For example, £3 a day – would mean by the end of the year you had £1095 in your emergency fund!
Have you got any great tips for budgeting and emergency reserve building? Let us know your ideas in the comments!