Emergency funds: how to get started
Emergency funds: how to get started
If you’ve ever been in debt, then you know the struggle around paying the debt off and the mental burden that may come with it. It is easy to think that just because we have a regular income and are paying bills on time, we will never get into debt. But, life can certainly be unpredictable and any unexpected changes to circumstances or the need for emergency expenses could push us down the debt hole. Accidents, ill-health, house repairs, a failed MOT or family obligations can all come out of nowhere and cost a lot more than expected.
This is when having emergency funds can help you deal with life’s mishaps in a comparatively easier way. Emergency funds are monies set aside for when you need them the most; it’s your financial safety net.
This money is not to be used for things that you may want, such as your dream holiday or for buying Christmas presents; it’s strictly for real emergencies and needs that you may have whilst in debt and would, therefore, need to remain untouched for any other use.
3 Benefits of having emergency funds:
- Comparatively low-stress levels as you are more financially secure
- They could help you stay out of debt as you don’t have to make any last minute money arrangements
- They can encourage financial discipline as you may be saving regularly
How much should I put into my emergency fund?
3-4 months of your monthly expenses is considered enough for an emergency fund. So if you’re out of work for some reason, you should be able to cover your expenses until you can get back on your feet - the cash can be used to cover mortgage/rent, insurance, utilities, food, and daily transportation.
Where can I save my emergency funds?
Wherever you want – preferably somewhere away from your daily access. This can be done by using one of U’s Extra Accounts to set some money aside regularly. However, once you have gathered a considerable amount, it may be worth looking at using a savings account to earn some extra interest.
How can I save so much?
‘That’s impossible – I don’t earn enough to save,’ ‘I am already in debt so I can’t save at the minute,’ ‘I am too young to start saving’ – There are a lot of reasons to delay, but it’s important to understand that in order to build your safety net you need to start RIGHT NOW!
Building up emergency funds can be a slow process and would require extra effort if you live on a tight budget.
Let’s take a practical approach and crunch some numbers as an indication of what saving for emergency funds could look like.
Let’s say your average household expenses, including rent/mortgage, bills and food totals to £1500 a month.
Avg. expenses * 3 months = £4,500
1-year plan: £375 per month OR £12.50/day
3-year plan: £187.5 per month OR £6.25/day
5-year plan: £75 per month OR £2.50/day
The above plan would need to be adapted based on your financial capability and monthly expenses, however, if you break down the numbers, you’ll see that saving for an emergency can be achievable. It could cost you as little as a cup of coffee each day.
If you think you’re in debt and want to pay it off ASAP, don’t despair, it could still be worth setting aside money for an emergency fund – as outlined above it can be a small amount every day.
Buy a less expensive car, downgrade your phone, skip eating out regularly at expensive restaurants, use some grocery shopping hacks and budget effectively – a few changes in your life with some effort can help you build your emergency funds. You’ll thank yourself in the long term!