This past year has been tough for everyone and if there is one thing I have learned from 2020 is how important it is to have an emergency fund!
You never know when an emergency can arise, whether it’s your car or home repairs it can cost a lot of money which you don’t have spare.
2 years ago I was in a car accident, I was fine but my car wasn’t! The repairs on my car cost over £1,000 and I did not have this money saved. Which meant I had to put this on my credit card which left me in debt.
Since then I have learned my lesson and I now have an emergency fund, it isn’t fully funded but I am in a better position than I was 2 years ago.
Unfortunately, no matter how much you prepare you can never avoid emergencies and having an emergency fund is one of the best ways you can avoid using your savings or even getting yourself into more debt.
What is an Emergency Fund?
An emergency fund is money that you set aside for emergencies, this money isn’t used to buy yourself clothes etc it’s for emergencies only!
This fund shouldn’t be used as a long term saving pot, but rather one that you treat as a safety net, so don’t be tempted to dip into it.
During the pandemic my emergency fund has helped so much, I had to get my car repaired a few months ago and having this money available allowed me to pay it off without having to use any of my savings.
I get so many questions about if I think this fund is worth it and the simple answer is yes! When you are starting out on your budget it will help you so much so I can’t recommend this enough.
How much do I need in an emergency fund?
According to www.bbc.co.uk from their report in March 2016, it is recommended that you have between one and two weeks take home pay as buffer. This is roughly £400-£800. However an emergency fund should allow between 6-9 months of expenses which is roughly £1,000 a month. (See quote bellow)
“It recommends keeping between one week’s and two weeks’ take-home pay as the buffer. Translated to the UK, this would mean saving between roughly £400 and £800. An emergency fund should allow for between six and nine months of expense, it adds. If these were to come to £1,000 a month, that’s between £6,000 and £9,000.”
At the moment I aim for £1,000 to cover repairs and expenses on my car. I live at home so I am in a lucky position and I do not need to that much money. However, next year my boyfriend and I are planning on buying a house.
So we are going to start building up our emergency fund in January when we work out how much on average our expenses are going to be.
I would recommend starting small, with a few months’ worth of expenses before you build up to 1 years’ worth.
Where should I keep my emergency Fund? Cash or savings account?
It is entirely up to you! But your emergency fund needs to be easily accessible. Don’t leave it in an account that you can’t access.
My emergency fund is in a savings account in my bank account, I am able to withdraw the money within seconds and use it.
However, you will need to have some self-control and not use it for just anything.
For me this fund is at the bottom of my homepage on my online banking, it’s easy to access but it is not something I can see all the time.
When should I use my Emergency Fund?
The only time you should remove money from this fund is for emergencies, not to pay for clothes, holidays or nights out.
It’s used for home repairs, car repairs and paying bills if you lose your job or some of your income.
It is difficult to decide what an emergency is, but the way I view it, if it’s something that you need in order to survive or get to work then use this fund. But this doesn’t include buying shoes, clothes and makeup.
But don’t be afraid to use it if you need it!
How Do I Save For My Emergency Fund?
The most important thing is to create a plan to decide where you want to start. You need to determine how many months you want to be covered.
The best place to start is with one month, write down all your essential bills and expenses. Once you have this figure you can decide how much you’re going to save each month.
If you have lost your job or have your income reduced then you may have to make scarifies and remove your favourite entertainment subscriptions to pay for your essential bills and expenses.
Essential bills and expenses:
- Mortgage/ rent
- Heating, Water, electric
- Car insurance
- Council Tax
- Insurance (Life, home etc)
- Groceries (toiletries etc)
There are many more but this is just a brief reminder.
One thing to remember is that you need to build this fund up quickly, so it may be worth slowing down other savings goals whilst you build this up.
Always set up and instant bank transfer and include it your monthly budget. For my fund I put £100 away each month for me this is enough but I know when we move I will need to up this.
So What Are You Waiting For?
Imagine what it will feel like having a fully funded emergency fund! It is a great feeling, when an emergency arises you will have the money their ready without effecting your savings or putting you in more debt.
I would recommend starting this fund before you starting paying off lots of debt and savings. This fund will give you a peace of mind!
Start small and build up, once you have a month saved work up to a few months and so on.
Have you got an emergency fund? If not what are you waiting for!