When should you use your emergency fund?
As the name suggests, it’s there for emergencies. That means things that crop up unexpectedly. We’re not talking about sales at your favourite clothing store or impromptu nights out with your friends just before payday; we mean real, urgent, necessary, and unexpected expenses.
That means things like major car repairs, job loss, urgent home repairs, all of which could adversely affect the way you deal with your day-to-day life.
How to save money and build an emergency fund
Building a sizeable emergency fund isn’t as difficult as you may think. The first thing you should do is decide how much you’ll need.
There are no hard and fast rules about how much this should be, but around three months’ worth of living expenses is an excellent place to start. Of course, if you can save more than that, go for it.
Once you’ve decided on your savings goal, you should start saving. The best way to do this is to set up a separate savings account, so you won’t be tempted to dip into it.
Next comes planning. Creating a standing order to save regularly is a great start. Reviewing your monthly budget might also flag up where you can cut back on unnecessary spending. Even cutting back £25 a month is better than nothing – simply allocate that extra money to your emergency fund.
A savings technique like zero-sum budgeting can really help. Rework your allocations until you’ve accounted for every £1 – and assigned some of those to your emergency fund.
Finally, think about what an emergency looks like and stick to that definition to ensure the money doesn’t get used for non-emergency items. If you do have to use it for an emergency expense, make sure you top the account up again.
3 benefits of having an emergency fund
From a financial standpoint, an emergency fund can help:
- Act like a safety net, giving you confidence to cope with life’s unexpected events.
- Prevent you from impulse spending because the money is in a separate account, out of your immediate reach.
- Save you from making bad financial decisions, such as borrowing quick access cash, which attracts high-interest rates, fees, and penalties.
By setting up and maintaining your emergency fund, you’ll help give yourself peace of mind that, whatever happens, you’re more prepared to deal with it.