What is an emergency fund?
An emergency fund is a pot of money that you save to use in the event of a financial emergency.
A financial emergency can be defined as any unplanned cost such as your boiler requiring a repair or something that comes completely out of the blue, leaving you wondering how you are going to find the money to pay for it. We’ve all been there at one time or another.
An emergency fund should not be used to pay for spending that you can plan in advance. So no dipping in to it for that holiday abroad, a night out or the latest iPhone! This is what your sinking funds should be used for.
Why do I need an emergency fund?
In the event of a financial emergency and without an emergency fund you are left with only a few options and most of these will result in some kind of debt. If you are on a debt free journey or are struggling to manage from one pay day to the next, then you really need to think about starting your emergency fund. Having this to fall back on is one of the key aspects of successful budgeting.
Isn’t that what my savings are for?
In a word, no! Your savings will either be for your longer terms goals, whether that be a holiday, getting married, buying a car or moving house, or will be a combination of your sinking funds.
Your emergency fund is something that you will spend but only when a financial emergency hits.
How much should I have in my emergency fund?
The amount you should have is personal to you. If you have no emergency fund at all, then just setting yourself a target of £100 is the best way to start.
To work out how much you may need, you should write a list of all the types of emergency you would like to cover, along with an estimate of the amount you would need to save. This will provide you with your own personal emergency fund total which you could start saving by putting away any little bits of spare cash you may have.
Some people aim to have 3-6 months salary put away. I could only wish to have that much set aside in my dreams! But I do have an emergency fund, even though it’s a small one (£2000) and I didn’t get that overnight. It took a couple of years to get it to that amount due to the limited amount I had to save and the few occasions where I needed to use the emergency fund (boiler repair and car repairs anyone?) Which meant I then had to replace the used cash too.
However, if I hadn’t had the money sitting there in the first place, then I would have had to resort to using credit cards, repaying it over a number of months and paying interest.
How to start an emergency fund
Starting an emergency fund can be really simple. Work out your budget and decide how much money you could save towards this each month. It doesn’t matter whether that is £1 or £100, just start.
Make sure you have a separate account set up as this should stop the temptation to dip into this money for a non-emergency!
But I haven’t got any spare cash!
Don’t be put off by the amounts you see some people saving for their emergency fund. Start by setting yourself a goal of saving £10, then increase your goal to £20 and continue increasing your goal bit by bit. Setting yourself small, attainable goals will help keep you motivated. Why not try making it fun by downloading my free savings chart and colour along as you go.
In addition to squirrelling away a bit of spare cash, you should also take a look at any areas where you may be able to cut back or reduce your budget. You could start meal planning to save on your grocery spend and put the spare cash in your emergency fund. Or how about swapping your weekly takeaway for a fakeaway and saving the difference. You could try a savings challenge or even try to increase your income by doing paid surveys.
The key is to start small but start somewhere and begin to take control of your finances.