The emergency fund

So, we agree on one thing, that you need an emergency fund. However, you’re either unsure of just how much money is needed to constitute an emergency fund, or you’re stuck as to what to do first. Hopefully this article will help to answer the most important questions regarding the emergency fund, and more importantly it will help you to create one of your own.

 

Peace of mind

The most important thing which an emergency fund can provide is a reduction of stress, and less general worry and anxiety about just how you’ll pay for those unexpected events. Not only will you have money in the bank to take care of the financial implications, but more importantly, you’ll be able to focus on what really matters during the emergency. Taking care of your loved ones is of utmost importance during these times, and a fully funded savings account will certainly ease your concerns in this department.

 

Emergency fund basics

There are three basic concerns regarding your emergency fund, and you’ll find all you need to know on these points below.

You need an emergency fund because life happens! Unexpected occurrences will always crop up, which sort of makes them expected, and so for that reason it becomes vital that you prepare.

An emergency fund will allow you to quickly and easily get your car to the garage, or call in the plumber to that broken washing machine. Not only will it allow you to do these things stress free, but it will allow you to pay for these items with minimal fuss. You simply hand over the cash, and move on.

Once you’ve realised that you need an emergency fund, the next step is most certainly to create one. Now, this is where it becomes a little tricky, as different people will see different events as an emergency. For example, some people will be totally comfortable with their car being out of action for a week and simply take public transport, however other people will go into full-blown panic mode.

Either way, it’s very wise to build up an amount of £1,000, and do this as quickly as possible. That word is underlined for a reason. I can’t stress enough just how important this part is. No Frankie & Benny’s, no cinema, no heading to the German beer festival until £1,000 is set aside. Without this, you once again have to resort to using credit cards, and face the prospect of paying someone else interest, which incidentally is giving them money for no reason! If you’re really lucky then you may be able to borrow from friends or family, interest free.

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. So, once this £1,000 is in the bag, then you can breathe a little easier. But not too easily. Martin Lewis, founder of MoneySavingExpert.com, recommends setting up an emergency fund to the value of “at least six months’ worth of bills”, although three months’ worth “wouldn’t be too bad”.

So, you now know why you need an emergency fund, and also just how much is needed. The last detail that needs to be looked at is just exactly where to store this money to maximise its benefit to you. An emergency fund should be easy to access, but not too easy. I’d recommend to keep the money in a separate bank or savings account so that you don’t always see it when looking at your regular accounts, however it is accessible for when you do need it.

For this reason it’s imperative that this money isn’t invested in any form of stocks, bonds, or any other investment. Investing is a long term process, and in the short term you could lose money. Therefore your emergency fund must be kept in cash.

 

Start saving

Right now, finding £1,000 in spare cash may seem light years away. With UK inflation remaining at its highest since early 2012 it’s understandable that households here in England are really feeling the squeeze. Believe me, I know. Right now, I’m working two jobs, and incidentally I will go into side-gigs in great depth in later articles. I digress.

Anyhow, there are plenty of ways to start the ball rolling…

  1. Create a monthly budget. You’ll be amazed at just how much fat you can trim from your spending when you sit down and analyse just where your money goes. For this you need honesty. It may not be good reading when you first do this, but you have to do it!
  2. Stop spending! Please, stop spending! Every pound that you spend on unnecessary purchases means that there’s one less in your emergency fund. Consider reducing or cutting altogether your Sky TV bill or magazine subscriptions. Perhaps you could reassess your mobile phone contract, or even just knock those date nights on the head temporarily. Whatever you cut, add this money to your emergency fund. Only after doing “Step 1” of this list will you be able to master “Step 2”.
  3. Maximise your income. In 2017 there are plenty of opportunities to work from home in a second job. The world has changed and a second job no longer means delivering newspapers or take-away food. In later articles I’ll explain just how you can make a second income from sitting at your computer for a few hours each evening.
  4. Sell your unwanted belongings. As the old idiom goes: “One man’s trash is another man’s treasure” and eBay has an excellent article on how to get started with selling your unwanted possessions. If it’s under a bed, or in the loft, and you’ve genuinely forgot that you had it, then it’s time to sell it!

 

Final Thoughts

The emergency fund is a wonderful tool, and it should be used by everyone, regardless of wealth. It should be seen as a tool that will actually save you money in the long-term, rather than starve you of it. When an unexpected emergency rears its ugly head, then the fund is there to at least cushion the financial implications of such events.

Good luck, and happy planning.

 

 

2 thoughts on “The emergency fund

  1. I have a $1k emergency fund, while my wife has *several* emergency funds ranging from just a couple hundred to $6k. She likes to have several accounts for different emergencies whereas I prefer just to throw it all in one account. (We just got married, so that’s why our accounts aren’t merged yet.)

    1. Joe, many thanks for your insight! It’s interesting to learn how different peoples’ approaches can be towards this subject. I too prefer the “everything in one bucket” approach, mainly for simplification reasons. Thank you for the kind comments, Steve.

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