You know the score – life is ticking along nicely, everything is going your way and you’re feeling good. Then BOOM!! Out of nowhere, without warning, the car breaks down and is going to cost £100s to fix. You haven’t got the money and you are going to have to put it on credit. You work hard at trying to pay it off and then the boiler packs up. Again, you’ve not got the money to pay for it. After all, you’ve been busy paying off the car repairs. So the boiler also has to go on credit. That’s another £2k of debt that has to be paid off.
But what if there was another way? Well, let me tell you…there is another way! It’s called an ‘Emergency Fund‘.
An emergency fund is money set aside for….well, an emergency. The purpose of an emergency fund is to prevent you from going into debt when life throws you a curveball. What if you lost your job? How long would you be able to stay afloat before needing to borrow money to see you through? All of those bills will still need paid and it may take months to find a new job. You don’t want to be using your credit card so an emergency fund is a MUST.
How much should be in your emergency fund?
The general consensus is that you should have three to six months worth of expenses saved as an emergency fund. If your job is secure and you aren’t the sole family provider then three months’ worth of expenses should be sufficient. If you are the sole provider or your job isn’t typically secure then you should aim to save six months’ worth. For example, hubby and I are both self employed and our income is very variable. We can, and often have, lost chunks of our income overnight when our customers change their requirements. We have therefore saved six months worth of expenses. If I were, say, a teacher I would probably choose to save three months of expenses.
What are classed as expenses?
When we talk about having three months or six months worth of expenses this doesn’t mean your total monthly outgoings as they stand today. We’re talking about the bare bones outgoings. The absolute essentials. This would include mortgage/rent payments, council tax, debt repayments, transport costs, grocery costs etc. It doesn’t include things like gym membership, Netflix, gifts etc.
Where you should keep your emergency fund
Your emergency fund should be ‘liquid’. That means that you should be able to access it immediately. It shouldn’t be tied up in the stock market or property etc. You should keep your funds in an easy-access savings account. If you can find an account like this with a decent interest rate then that’s great but earning interest on your emergency fund isn’t the aim here – it’s about having a lump of money that you can access quickly in the event of an emergency.
How to Build your Emergency fund
Saving thousands of pounds can seem like an impossible task but there are many ways in which you can build your fund.
Sell things from around the home
Take a look around you right now. I bet there are things that you no longer need or use. Work your way around your home and put together everything you know you don’t need. Then sell it on Ebay or Facebook Marketplace. I made £100s by doing this and I put it all toward our emergency fund.
Use your tax refund
If you’re self-employed and get a tax refund put it straight into your emergency fund pot.
Take on a side-hustle
I took up matched betting and made thousands! It’s a seriously good earner and I honestly don’t know why more people don’t do it. All of your earning are totally tax-free and it’s good fun too. Take a look at my post on matched betting.
Take on a second job
I know, I know. You’re already busy and don’t seem to have a second to spare. I get it. But this is a great way to earn some extra money for your fund. It’s not forever and you might even like it! Or if you can’t take on a second job can you increase your hours at your current job?
Whenever you receive cash as a gift chuck it into your fund. Boring I know but again, it’s not forever.
What counts as an emergency?
Our emergency fund is to be used only in dire circumstances. As I said above, losing your job is an emergency. You have no money coming in and bills to pay. Use your emergency fund to get you through.
Christmas is NOT an emergency. It happens on the same date every year. We know it’s coming. It’s not out of the ordinary and we can prepare for it.
Your roof leaking or your boiler breaking are emergencies and if you don’t have the cash for the repairs then your emergency fund is there to be used.
Wanting to upgrade your car is NOT an emergency. Going on holiday is NOT an emergency. I know how tempting it is to use the money for things like this but if you do then you leave yourself vulnerable and risk having to take on debt.
Remember – if you have to dip into your emergency fund be sure to top it up again! Always keep the full three or six months worth of expenses in there.