An emergency fund, in my eyes is a must have. What it is, is basically a bank account you have with enough money to last you for 3 months or so, incase you loose your job, or an emergency pops up, like your car breaks down, boiler packs in… and so on.
This money is there to help you get by in tough times. Having an emergency fund also means you will not have to dip into retirement savings if the time comes that you need money for en emergency, for example, I am self employed, so I will get no sick pay from a boss/company, so I need to make sure I have enough to pay bills with.
You should not start building an emergency fund until you have all your debts cleared up, or, then ones you want cleared that is. You should also not be investing in anything until you have an emergency fund in place. You don’t want to have a nice investment portfolio built up, and then have to sell everything to fund an emergency.
Let me tell you a story, about 6 months ago, my girlfriend lost her job, I won’t go into detail, but, if she didn’t have an emergency fund, she would have been stuck with no money, and no way to pay bills.
Credit cards are not en emergency fund!
Many people think just because they have a credit card, they have an emergency fund. This in reality is taking you the opposite way you need to be going. You have been sticking to your budget, paying off those debts, and now you are wanting to rack up more debt! Wise up! Save the money in cold hard cash.
How to setup an emergency fund
An emergency fund is nothing special, no special accounts are made for it, it can just be a regular savings account or current account, though, I would pick the account with the better interest rate, usually a savings account, also, check to make sure there are no minimum monthly payments, or monthly charges associated with the account.
How much do I need in my emergency fund
Many financial experts say that you need 3-9 months worth of money in your emergency account. For me, having enough for 4 months worth of no income is fine. If I loose my job, or can’t work for whatever reason, my emergency fund will cover all my bills for 4 months. When I say cover bills, I mean my rent, food, electric, heating, I don’t mean eating out, buying nice things… My savings and investments would also be put on pause until I get a steady income again. Referencing the 50/30/20 budget rule, my emergency fund would only cover items in the 50% category of the budget.
How long will it take to build up an emergency fund?
This depends on how much you can save towards your emergency fund each month. Again, referecning the 50/30/20 budget rule, save 20% of your income towards an emergency fund until you have what you need to be able to survive for a minimum of 3 months with no income. This should take anywhere from 3 months to 12 months to save up. That may seem like a long time, but trust me, it is well worth having. I read a statistic somewhere saying that something like 60% of the people in the UK couldn’t pay a £500 bill if they got it without warning. Source: BBC
What can I use my emergency fund for?
Well, like I said above, your emergency fund should only be used for an emergency, like a job loss, leaving jobs and helping you get by in-between work, broken down car, any bill that was unexpected basically. It is there to help you through a hard time. You shouldn’t use it to go buy those new shoes you have been eyeing up, or that sweet new GoPro.
Do I still save into my emergency fund, even after I have enough in it?
For me, yes, I still save into my emergency fund each month, even though I have enough in it to last me 4 months. You don’t have to save loads each month, £40 or £50 is plenty, just look at it like this, the more you can save into it, the more freedom you have, you can leave that job you hate, and have money to get you by until you find the next, you can fix that broken car or pay that unexpected bill. The benefits of having an emergency fund well outweigh the negatives, I can’t even think of any off hand, maybe shitty interest rates…
Building an emergency fund fast
If you want to build your emergency fund faster, its time to start going around the house and find things you never use, and can sell, for example, I had an Xbox, which I used about once every 6 months, usually to play a DVD. I sold it on eBay, and got £60. It may not be a lot of money, but £60 is £60 in my eyes.
If you find yourself with money left over from your personal allocation (50/30/20 budget), put it into your emergency fund, don’t be tempted to go out and blow it, or if you do some extra hours at work, or get a bonus, put this into your emergency fund.
You cold also think about putting it into a very low risk investment account, such as a Wealthify Low Gain Account, this will gain you maybe 5-6% on your investment over the space of a year, again, not much, but every little helps.
Reorder your 50/30/20 budget, so that 30% of your income is saved, and 20% is allocated to personal spending money. You may not like the sound of this, but you should try it, even for a month, or two. You might be amazed at how easily you can get by on 20%.
Anyway, I hope this article has helped you out with emergency funds, please share it on social media!