The only guarantee with your finances is that you never know what is around the corner. Sometimes it can be hard enough to keep yourself afloat, but what do you do if there is a sudden change in your circumstances? If you, for whatever reason, are not able to earn or you need money in a hurry, where do you get it?
One answer is by setting up your own personal emergency fund.
What is an emergency fund?
An emergency fund is, as the name implies, a fund that you have in reserve for emergencies. This can be anything from you losing your job, your boiler breaking down, your car needing repairs, essential home maintenance, a loved one falling ill meaning you need to time off work, unexpected moving costs – the list is potentially endless.
There’s always something lurking around the corner, and it can often be more expensive than you anticipate. You could turn to an emergency loan or other similar short term finance option – but better yet is to pre-emptively have money in reserve to help deal with these unpleasant surprises.
Your emergency fund is your safety net and means you always have access to money at short notice. It is easy to think you are “fine”, but the reality is that unexpected bills and negative circumstances occur to everyone from time to time. You need to think about establishing a fund to keep your finances afloat if this happens.
How do you get started?
So an emergency fund is clearly a good idea, but how do you actually go about getting one? The first step is going to be getting yourself a dedicated savings account. There are lots of specialised accounts available from major banks and building societies, but it is wise to choose a basic savings account. You want to make sure that when you need the money you can access it, transfer it, and withdraw it in a hurry – certain accounts place limits on the way you can interact with them. See this article for more info on the different types of account available.
Don’t be tempted to use any existing accounts you may have, as you might be more inclined to dip into the money or spend the money without realising it. If you get yourself a dedicated account you can start from scratch, know exactly how much money you have available to you, and easily keep it apart from the rest of your finances.
Most banks will allow you to set up a general savings account for free and in a matter of moments – particularly if you are an existing customer.
Starting your saving
With your account established it’s time to putting money into it – but how do you begin?
The key to saving is regularity. You will be better served saving a little every week than trying to make irregular larger deposits into the account. If you have the ability to, it might be wise to set up an internal standing order that allows you to automatically deposit money from one account into another – this means you don’t have to remember to do it yourself. A standing order of £10 or £20 per week probably won’t noticeably impact your day-to-day finances, but can lead to a quickly developing fund.
Know your goals
How much is enough in your emergency fund? There is never “too much”, but of course you need to balance building your emergency fund with paying your bills and other life expenses. So what is a good goal for you? In theory you should aim to be able to cover at least three months of your general expenses from the emergency fund. This should be your baseline. Work out your monthly expenses and learn what exactly you need in order to survive comfortably – use this as your goal.
Of course, if you’re finding that you can comfortably keep paying into your emergency fund, then do so. There is no upper limit, and the more you have in your emergency fund the longer you will be able to be financially comfortable in the event of an emergency. It also means you can more comfortably handle any large and unexpected bills you face.
The hardest part
One of the hardest parts of establishing an emergency fund is having the willpower to get it started. Once you have everything in motion, you might be surprised by just how quickly you can accumulate a comfortable financial cushion.
So, to recap, here’s what you need to do:
– Establish a dedicated savings account with your bank
– Understand how much money you need to survive an average month
– Set up a standing order, if possible, from your main account to the new fund
– Realise your emergency fund goal, and commit to reaching it
– Resist the urge to dip into the fund unnecessarily
Hopefully, you will never actually need your emergency fund, but in the case that you do, make sure you have taken the appropriate steps to ensure you have money available to you. Saving now can prevent you from falling into debt and financial trouble further down the line – it’s never too late to start.
We’re proud to bring you this feature in association with Growing Power. For more advice features, please pay a visit to our lifestyle page.