You may or may not have heard the term emergency fund thrown around a lot from many different people and places. I know when i first started my debt free journey i didn’t know why i would need an emergency fund, or how much i needed in my emergency fund.
It all boils down to your own financial situation. If you are currently living paycheck to paycheck or in over your head with debt, an emergency fund works in two ways. It will break you into the process of saving money when you have been used to living above your means. Your emergency fund will also act as a safety buffer to avoid going further into debt due to loss of job, illness or an emergency. In this post i will explain why you ABSOLUTELY need an ‘emergency fund’.
Why you need emergency savings
It’s happened to us all, your car breaks down and needs repairs or your house needs immediate repairs out of the blue. We all need to prepare ourselves for sudden expenses we were not planning.
Your emergency fund is a way you can deal with any sudden costs that come your way, without dipping into money that’s needed elsewhere or even worse a credit card or loan. If you are attempting to get out of debt already it can pose major problems to your financial situation if you do not currently have savings for emergencies.
How much do you need in savings.
When it comes to how much money you need in your emergency fund it is dependant upon each individual. You need enough savings for basic repair bills, but you also want enough for a major problem such as losing your job.
If you would like to make a start saving for your cash buffer i would start with reading our 52 ways you can save money that actually do work.
The most popular starting point would be £1000 in your emergency fund. This should cover any small expenses. At this point, you want to consider paying off any debt you may have.
If you are not in debt currently or don’t think £1000 is a comfortable amount to have in emergency savings, the next goal would be to save 3 months of your living costs. So if you spend £1300 on your rent / mortgage, food,utilities, transport and any other regular outgoings you would want to save £3900 for your cash safety buffer.
If you are not sure what your expenses are at the moment, don’t worry. However i highly recommend creating an accurate budget for your money, before setting any financial goals.
Where to save your emergency fund
You want to keep your safety buffer someplace easy to access, after all it is in case of an emergency and you never know when the next one is coming. We keep ours in an instant access safety account. The interest is near non existent but at least there is a little.
Your emergency savings should also be kept away from your regular accounts, you know what they say “out of sight, out of mind”. The last thing you want to do is dip into your savings for something silly. It’s important only use your emergency funds for actual emergencies.
How much is too much?
If you have more than 6 months of essential expenses left sitting around gathering dust, you are missing out on interest! You can usually withdraw cash from high interest savings accounts and investments relatively quickly. Or faster than 6 months! (check your terms). If that’s the case, why not invest some of your emergency savings and make a little on the side.
It’s important to have some spare savings in the bank incase something goes wrong. Having a well stocked emergency fund will allow you sleep easier at night knowing you have it covered.
By time you manage to save your emergency savings, you will be wiser with money and able to save even more for whatever goals you do have financially. I hope our emergency fund guide has been helpful to you, if you have anything to add, please leave a comment, it is much appreciated! As ever live more and spend less.