Once in awhile, I like to review our financial position and see what changes we might need to make. It’s also a good time to talk about money and how to make sure we are ready for any emergency eventualities. So, today I’d like to encourage you to really think about an emergency money fund, if you don’t have one.
Many people wonder whether or not they need an emergency money fund. How do you establish an emergency fund? How much money should be in an emergency fund? Here are some ideas and suggestions that should help answer these questions.
Is an Emergency money Fund Necessary?
Generally speaking, yes, an emergency fund is necessary. What form it takes can vary, but it is almost always a good idea to have one. Such a fund can help you avoid high-interest debt, and it helps to reduce stress if something unexpected happens.
After all, life is full of changes – many of them sudden and not good – and having that “cushion” can help you feel ready and calm. This can cover a sudden medical bill, large utility bill, food, gas, car repair, insurance cost, or travel funds if an emergency arises (medical, natural disaster, etc).
How Do Create an Emergency Fund?
1. Map out all your expenses
First, determine your expenses. Look at three to six months’ worth of living costs and count on saving that much in your emergency fund. It won’t be created overnight, but any extra amount you can save each payday will help you get there. Your emergency money fund can help you to keep your standard of living for a time if you lose your job, or it can cover a large expense such as vehicle repair.
2. Set out your emergency saving target
For this, see my notes below
3. Decide on timescale to achieve your goal
Next, determine how long it will take you to save the amount you’ve set as your goal and figure out how much you have to take out of your salary payment each month to reach that goal. It may help you stay motivated to set smaller goals at first.
For example, what is your monthly food budget? Set a goal to save up that amount. Next, what is your monthly rent or mortgage payment? Set a goal to increase your emergency fund to cover food and housing. Next, what is your insurance cost? Set a goal to increase the savings to cover this amount. If you save in smaller amounts, it will add up over time and might not seem so intimidating.
4 Create a separate account for your emergency fund
Once you’ve determined how much you need to save and how long it will take to save it, it’s a good idea to change your mentality to put payments into the emergency money fund before you pay for anything else. If you can do it by direct debit or automatic deduction, go for it – see if you can have a portion of your salary taken out and put into a savings account. Otherwise, make it a habit to put money in your savings first and foremost, and then take care of your other expenses after.
- Top tips on sticking with your budget >>
- How to budget for all your Christmas gifts >>
- Budget friendly ways to look after your mental health >>
How much money should I have in my emergency money fund?
As I mentioned before, the idea is to have a minimum of 3 months of your current expenses in savings as an emergency money fund. So, for example if your current outgoings are £1200 a month, you should have £3600 in your emergency fund.
The 3 months is an absolute minimum and going by the recent world wide economic shake up, I’d suggest that 6 month should be minimum.
Beyond that, your money should to towards saving account where you can earn a little bit of an interest. Your emergency money fund need to be kept in an account where you can have immediate access to it, should you need it.
what If i don’t have much money to save?
Even if you have low income, you can set aside something each month. Try saving a percentage of your income, such as 5 or 10 percent. It may take you longer, but it will accumulate. You might need to look into saving money elsewhere, but having emergency money fund is even more important if you are on a low income.
- 5 ways to save money when food shopping >>
- How to save money as a pet owner >>
- 6 easy ways to save money on your television services >>
- 52 weeks alternative saving challenge >>
When should I use my emergency fund?
When should I use my emergency fund?
To show you the difference between normal savings and an emergency fund, let’s have a look at when it’s a good idea to spend your money.
Emergency saving fund should not be used for anything that’s a regular need, like food shopping, holidays or travelling or buying home appliances. If you want to buy something, save up for it separately and then buy it.
So in what instances would you use your emergency fund?
- You’ve been made redundant or lost a job and can’t find work straightaway
- You are temporarily ill and can’t work
- Unexpected large bill for health care
- Home disaster (e.g. collapsed walls, water leak damaging house etc.)
- Car incident, damage or accident
- Life, death or basic needs kind of purchases (e.g. broken cooker or washing machine, that can’t be repaired)
Does my emergency money fund have to be big?
In short, no. An emergency fund does not have to be massive – but it certainly should cover unexpected expenses. To determine the size of your fund, consider what sorts of emergencies you’d want covered by the fund.
Remember that buying insurance may be a more cost-effective way to guard against emergencies, too – evaluate the scope, likelihood, and potential cost of possible emergencies and this should give you a clearer picture of how large your fund needs to be. Just be sure to save enough to cover the deductibles so if you need to file an insurance claim, you have your portion in the bank so you don’t have to stress about where that money will come from!
Do you have an emergency fund? What tips would you offer to someone just starting an Emergency Fund?