Most people do not have enough funds set aside for emergencies. If something happens to their vehicle, health, or home it’s usually the case that borrowing needs to occur for said costs to be covered. This isn’t the correct way to go about it. I’m going to go into why it’s important we have an emergency savings fund ready for tough times.
Why you should have an emergency fund
What do you do if your boiler fails? Call out a certified plumber, of course. Even if you’re covered with your supplier (like British Gas), you’ll need to take a hit with the purchase of a replacement if it’s broken beyond repair. Boilers aren’t cheap and can easily hit £1,000 or more.
An emergency fund would cover this cost and then some, allowing you to easily endure the hit without stressing out about finances. This purchase wouldn’t affect your monthly outgoings and rent, mortgage, bills, and groceries could still go through.
If you do not have an emergency savings fund at the ready, you will need to cut back on expenses for the month(s) ahead, as well as potentially taking out a loan. If you’re not eligible for an insecure loan, a credit card would be the next viable option. Whichever form of borrowing you choose, it’s wasting money through interest.
How much do you need in an emergency fund?
As a general rule of thumb, it’s best to give yourself a good buffer should anything arise that requires payment. This could be a minimum of three months of essential outgoings, but I prefer to have at least half a year. That’s six months of outgoings covered should you lose your job.
To work out how much you spend per month, add up your mortgage or rent, groceries, bills, as well as other financial commitments and miscellaneous payments. Then multiply this figure by six to get a rough estimate. Having this amount available at hand not only gives you peace of mind but enough to cover most emergencies.
How to start saving for an emergency fund
The easiest way to set up an emergency savings fund is to open a savings account. You could use a savings account with a modest interest rate, but you could also use a low-risk investment portfolio, which while makes accessing the said funds a little slower, would allow you to beat inflation and then some.
Once you’ve got an account ready to go, set up a standing order from the account your wage goes into and send small, regular amounts to the newly created fund. The goal here is to add regular amounts, which is better than throwing in considerable amounts infrequently.
This allows you to enjoy life and spend money elsewhere, in your pension, investment portfolio, or even saving up for your dream home. As long as a set amount is going into an emergency fund, you’re good to go. Just save what you can, as often as possible, even if it’s only £100 a month.
What to do next
Once you have a pot ready for any emergency to arise, it’s time to put your money to work. Any amount you were previously putting into this fund could be better utilized in a stock and shares ISA. As well as sorting out your personal finances, you can learn to invest right here on my blog.