Emergency fund – do you have one? If you don’t have one, then you need to set one up – as soon as possible! Now I know the term ’emergency fund’ doesn’t exactly fill you with excitement. In fact, it sounds downright dull! We should re-name it. How about the ‘**** hits the fan fund’ or ‘don’t need to ask the in laws for help fund’!
Anyway, an emergency fund really is essential. “Emergency” can be categorised however you wish – it’s completely personal to you – not everyone regards the same things as emergencies after all. However, I’m pretty sure that everyone has something break down on them or things going wrong that were not planned for.
Let me ask you, how would you fare if you lost your job tomorrow? Or your washing machine broke? Your fridge? If your car breaks down and you are hit with a huge garage bill (when are they ever not huge?!). If a family member passes away and you have to fly to another country?
If you have an emergency fund, you will be much better equipped to managing these stressful situations. They always seem to happen in quick succession too!
How much should you save?
Everyone has different opinions on this one. Some say a months salary, 3 months, 6 months, a year. If you lose your job, that’s a big decrease in your income until you get a new job. So you will need a good amount of money in order to be able to still pay your bills. If you are self employed, or if you only have one salary coming in, it may be better for you to have a very big emergency fund.
Where should you keep the emergency fund?
This is really important. There is no point having the emergency fund if you keep it somewhere that you can easily dip into, because it will be too tempting. It is for real emergencies, not because you have spent all of your rent money on going out clubbing! A savings account that you can’t easily access, and that has a great interest rate is your best bet. Make sure that you have a look around and find the best one for you.
How long should it take to build up the emergency fund?
However fast you can! Just starting is the most important step. You will not be able to pay off debt if you cannot build an emergency fund, because any emergencies that come up will have to go onto the credit card and the debt cycle will continue.
How to build up an emergency fund
To build up an emergency fund, you will need to look at your expenses and cut any that you can. Reduce your outgoings and create a budget. Once you have a budget, you are able to take a clear, full look at your finances and see how much money you are left with at the end of the month. If you earn extra money, this can be used to build up your emergency fund, as well as help paying off debt too.
Should you have an emergency fund if you are paying off debt?
Yes, absolutely. You want to stop the debt cycle, and be prepared for any bad things happening. When you have no money and are paying off huge debts, the last thing that you want is a huge bill coming at you and having to put it on the credit cards. This is very stressful and can be avoided by having an emergency fund.
Be prepared for emergencies in other ways
Ok, so you have your budget and you know how much you spend each month. But what happens when the emergency happens, such as losing your job? You will need to adjust your budget – this is now your emergency budget. So having an emergency budget is a good thing to fall back on in the difficult times. Cutting everything down to the bare bones and going into extreme frugal mode can be a big shock to the system if you aren’t prepared for this.
A survey by the Money Advice Service has found that four in 10 adults in the UK do not have £500 or more in savings.
Anti-debt charity Step Change says that, if every household in the UK had £1,000 saved, it would reduce the number falling into problem debt by half a million. Isn’t that a crazy statistic?! It’s so important to have money saved.
- If you can set up money to come out of your account automatically, this will help you get your savings up without making excuses
- You will feel less stress from having an emergency fund in place.
- Even if your emergency fund is small, it will still help you. Don’t feel bad if it’s not as big as you would like.
- An emergency is not something that can be saved for in advance, such as a holiday.
- Some alternative advice is to use all the money and savings you have to pay off your debts. It’s best to look at your situation and do what is best for you.
If you are paying off debt, an emergency fund is an absolute must. Even if you are not paying off debt, an emergency fund is still necessary. As much as we like to plan out everything, sometimes things come up that we are completely not prepared for. For instance, my mother in law had several members of her family in Northern Ireland pass away within months of each other. She had to get last minute flights, and pay funeral costs – which ended up costing thousands of pounds. She was obviously not expecting something like this to happen, and it was a very stressful time anyway. Don’t forget, emergency funds are for genuine emergencies, not just because you have slacked on your spending habits.
Does anyone else have an emergency fund? Would love to hear from you in the comments!
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