Having an emergency fund is something we preach about all the time. The biggest reason is that an emergency fund will change your life.
It worries me how many people still live without any savings or an adequate emergency fund in their lives.
Without an emergency fund, we would not be where we are today financially or been able to make key decisions in the past.
Our lives have changed by having an emergency fund, so can yours.
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What Is An Emergency Fund?
An emergency fund is simply money you have aside as your financial cushion when life happens.
On the other hand, a Sinking Fund is money you put aside for expected annual costs or special occasions.
You may also have savings for your goals such as buying a house or going on holiday.
An emergency fund is separate from these as it’s money earmarked for when emergencies come up.
I like to think of this pot of money as my personal credit card.
Why You Must Have An Emergency Fund
There are various reasons why I advocate that everyone needs an emergency fund, but largely it’s because life happens.
We set plans for our lives and feel optimistic about them, but the truth is life can throw some rocks at us.
Something could happen to your primary source of income, or you may have an unexpected expense.
Your emergency fund serves you as a safety net between you and life, keeping you financially secure.
How Much Should My Emergency Fund Be?
Many thoughts fly around the personal finance space but the truth is, it depends on your situation.
Having said that, I believe a good starting place is having £1,000 saved.
However, you should analyse how that £1,000 compares to your living expenses.
Another “rule” is to save at least 3 months worth of your living expenses as your emergency fund.
In other words, if you lost your job you would have enough money saved to pay for your lifestyle over 3 months.
Tips On How Much To Save Up
First, analyse your personal position.
Do you work in a steady job on a permanent contract, or are you on a temporary contract?
Do you live by yourself or do you have other people dependent on you financially?
The answers to these questions will help you decide what fits your circumstances.
When I was single, I had about 2 weeks worth because I could always move back with my parents should life sucker punch me.
As a married man with more financial responsibilities, I’m aiming to build up 6 months worth.
Where Should I Put My Emergency Fund?
Given that this is for emergencies, you’ll want to have easy access to this money to respond to emergencies quickly.
This money should be somewhere that you can access with ease.
You may think a secret spot in your house would be good, but there are savings accounts built for this.
Look for easy access savings accounts that come with a high-interest rate.
But to do away with the temptation to spend it we’ve got ours with a different bank than where our regular accounts are.
The ease of access is there, but we have to log in to the online portal to make a transfer.
What Happens When You Don’t Have An Emergency Fund?
Without an emergency fund, you will have no financial cover when the unexpected does happen.
Think about it, if you no longer had any income coming in, what would you do?
If you don’t have money saved up for emergencies chances are you’d turn to others for help.
An alternative is to deduct the money from the savings for your goals or to use your credit cards.
You end up borrowing money from people around you, or from your future self by getting into more debt today.
Without an emergency fund, you may find yourself in a worse-off financial situation.
The Decision We Made Because We Had An Emergency Fund
There was a time when Lindie hated her job! I won’t name the employer but I do love their sausage and egg breakfast McMuffins.
Working in a fast-food environment, she had controlling managers and rude customers.
Although she didn’t have another job lined up, she quit her job. It took her 6 months to get her next role from that moment.
But her mental and emotional health is far more important than money.
This decision was empowered based on us having an emergency fund saved up to cover our living expenses for 6 months.
A decision we wouldn’t have been able to make without having that money saved up.
The lack of savings takes that option away and you may feel that you can’t leave your job.
I honestly believe the power of having money aside as an emergency fund will change your life.
How An Emergency Fund Will Change Your Life
Having savings that cover you when an emergency happens is honestly one of the most peaceful positions to be in.
I can’t put a price on knowing you don’t have financial stress as a result of an emergency.
Emergencies affect us mentally and emotionally too, so adding on money issues on top of that is not ideal.
You will be in a financially strong position whereby you don’t worry about how you’ll survive month by month.
As you build your emergency fund to cover many months of your living expenses, you could make different life choices.
And this is the power an emergency fund gives you. Life changing power!
Are you in a job that affects your mental health?
Or nervous about going on maternity leave due to the impact on your income?
Or has a health problem resulted in you having to take care of a family member financially?
I can’t stress enough the power of having savings aside and how life-changing an emergency fund is.
How To Build Your Emergency Fund
The first place to begin, as with all things money, is your budget.
Calculate the total amount you live on every month, especially the total for your essentials that you can’t live without.
Remember earlier I said your emergency fund should cover at least 3 months of your living expenses.
How much do you need to live on and pay for your life for 3 months based on your budget figures?
Once you know your total, you then analyse your current budget set up. Work out how much you can afford to save per month to reach that goal.
You may need to make some changes to your lifestyle choices to have more money to save.
As I said earlier, £1,000 is a good starting point. Over time you can build this to cover 3 months, 6 months, or 12 months of living expenses.
Take Action And Change Your Life
Start saving today!
Check out our Ultimate Money Plan to get in control of your money and smash your financial goals
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando
I like the analogy of EF as your personal credit card. I’d like to think of it as the ‘piggy bank’ you break in case of emergencies. With currently such low interests atm in savings accounts, is there a bank savings, you can recommend for it to be stashed at?
With rates being low we are taking the approach of having 3 month’s worth of living expenses in an easy access ISA because we still want to have the option to withdraw it whenever we need it. Believe it or not, we get more return from our bank account perks than savings at the moment. The rest is invested
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