Why you need an emergency fund

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Every month you diligently pay off your credit card bills, loans and make sure you don’t miss your rent payment. But is that enough?

If you’ve got nothing saved for an emergency, the answer might be no. A leaking roof here or a broken-down car there could be enough to put some people in a tricky financial situation. Here’s how to make sure you’re not one of them.

What is an emergency fund?

As the name implies, an emergency fund is a pool of money set aside to help you with a financial jam if something unexpected happens. It helps you plan for the unexpected, and avoid worrying about money at a stressful time.

Why might you need one?

There are many surprises life can throw your way, from an unexpected job loss to a car problem. Unexpected expenses can quickly turn into unexpected debt that can hurt your financial health.

An emergency fund can be a powerful safety net that offers you peace of mind when you need it most, and a little more control in an otherwise uncontrollable situation. In essence, it can be the difference between going into debt or being able to forget the whole thing ever happened.

Where should you keep your emergency fund?

Having extra money set aside as a safety net is never a bad thing. All you need to do is decide where to keep it.

Being an emergency fund, it's a good idea to make sure your cash is easily accessible and safe – for example, in an easy access online savings account. Always check for any withdrawal restrictions on the account you choose, so you’re sure you can take that money out when you need it. 

How much do you need in your emergency fund?

Figuring out how much you need for your emergency fund starts by understanding how much you spend on a regular basis. This means essential living expenses, not the nice-to-haves. In an emergency, all those extras like gym memberships, streaming accounts and subscriptions might need to go.

You’ll also want to consider how you earn your income. A freelancer may need to think about having more saved for example, just in case work dries up or is slow for several months in a row. 

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:

  1. Act like a safety net, giving you confidence to cope with life’s unexpected events.
  2. Prevent you from impulse spending because the money is in a separate account, out of your immediate reach.
  3. 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.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.

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