Why do you need an emergency fund?
A couple of years ago the Money Advice Service did some research that found that over 16 million people had less than £100 in savings. This means no rainy day fund: no money if your car breaks down, nothing to tide you over if you are off work with sickness; no cushion if you were to lose your job. If you have no emergency fund and the inevitable rainy day arrives, you are likely to have few options. Perhaps you will borrow on your credit card, from friends and family, or get by on your overdraft. For some, a super high interest credit card or pay day loan may be the only solution.
An emergency fund can help you avoid the embarrassment of asking family for help and enable you to avoid getting into debt. It will provide reassurance and a sense of security that you can cope with some of the financial ups and downs of life.
How much should you save?
US finance guru Dave Ramsey recommends that your first step should be to save £1000 in your emergency fund, before putting all of your focus into paying off debt (the ‘debt snowball‘). He then recommends continuing to save hard until you have 3-6 months worth of household expenses. The Money Advice Service also says to aim for around 3 months worth of expenses.
Interestingly, Martin Lewis at Money Saving Expert says you shouldn’t save at all, not even an emergency fund, if you have expensive debts. I understand his logic, but I tend to go with Dave Ramsey’s view that you should pull together at least £1000 whilst paying the minimum on your debts.
As he says, ‘It is going to rain. You need a rainy-day fund.’ If you focus all your resources on paying back your debts without an emergency fund you are likely to be tempted to use a credit card to deal with sudden expensive problems. Then you will have more debt! If you hit any literal or figurative bumps in the road and you find you need new tyres, you can deal with the expense without owing more money to anyone.
Where to start?
The idea of saving 3 month’s worth of expenses is intimidating for many of us, particularly if you are on a low income. Where on earth do you start with your emergency fund?
If you are fortunate enough to have money left over at the end of the month you can start straight away. Set up a standing order and transfer your target amount straight into a savings account.
You don’t want to tie your emergency fund up so that you can’t access it. However, leaving it in your current account means that it is too easy to spend. An instant access savings account will be fine. (My daughter transfers it to me. She knows I will save it for her but won’t let her have it back without a good reason!)
Kick start your emergency fund
If you struggle to get to the end of the month, it may be harder to get started, but it’s not impossible. There are lots of ways to kick start your emergency fund saving, such as:
Budget! If you plan a monthly budget you will know exactly what is available to spend and how much you can save. If you’re not sure where your money goes, keep a spending diary to help you cut out those unnecessary expenses.
Plan your meals and write a shopping list to save money on your grocery bill.
Have a clear out and sell some of your old stuff. You can make money by holding a garage sale, taking a pitch at a boot sale or by selling items at auction. You can dispose of your DVDs and books at Ziffit. CDs can go to Music Magpie. My favourite way to make money from things we no longer need is to sell on eBay.
Look at ways to earn extra income and make sure the extra all goes to your emergency fund.
See if you can haggle down the cost of your household bills. Shop around before you renew insurances, etc.
Peace of mind
An emergency fund brings peace of mind. Remember what it is for, though. An impromptu holiday because you are a bit stressed is not an emergency situation. A washing machine that dies when you have a house full of kids is. A broken mobile phone may need replacing with your contingency fund, but you don’t need to buy a brand new, state of the art smart one.
Birthdays and Christmas saving should be kept separate. You know they are coming round each year! Your emergency fund is for unforeseen expenses.
Do you have an emergency fund? How much do you save?
I’m taking part in the Monday Money linky with Lynn from Mrs Mummy Penny, Faith from Much More With Less and Emma from EmmaDrew.Info .
thrift deluxe says
I’m with Dave Ramsey on this one. A small emergency fund is so important to me, especially when we were paying off our debts, ours was only £500 though. Our budget was so tight but I needed to know there was money available should there be a trip to the vet, or some other pressing issue.
In the end we did without a lot of things we could have used the EF for, we took the car off the road, did without a washing machine for 8 months right at the end of our debt free “journey” and things like that, just to keep that cushion. Well worth it.
Fiona Adams says
I have a five figure sum in my emergency fund. My husband was made redundant four years ago and didn’t work for eighteen months 🙁 We needed that fund then and I wasn’t happy until we had scrimped and save to rebuild that fund. We continue to scrimp and save to try and pay our mortgage off early but that emergency fund will not get touched.
shoestringjane@outlook.com says
Wow, well done!
Fiona Adams says
When I say a five figure sum I mean very much the lower end of five figures before anyone thinks I’ve got £99k put by!!!! ( I wish!!!!! )
Julia says
This is something that has always been drummed into me! Every time I received any money from grandparents it was accompanied by the words “put it in the bank”!! 😀
Almost 20 years ago while living in America I came across a book called Debt-Proof Living by Mary Hunt which changed my life. While not a long-term Emergency Fund as such, she advocates setting up a “Freedom Account” for those things you know are going to come round – just maybe not as regularly as the monthly bills, such as car/house insurance, car repairs, healthcare (medical dental payments in USA) school trips, Christmas! etc
The important thing was to make sure you used it – ie it wasn’t meant to be a never-to-touch “savings” account.
It’s been a huge life-saver for me, especially the “school” and “car” sections, and since moving back here I’ve exchanged the healthcare section for MOT/car tax etc., and now the youngest is 16, have made the “school” section into a “holiday” section instead!! 🙂
I put a set amount into the account each month and on paper divide it into different amounts for each section – ie more is needed for “insurances” than “Christmas” these days, and periodically readjust which section gets though the total each month remains the same to make it easier to budget.
As I was also out of the country for so long I also, separately, put away enough in each month to pay some historic National Insurance Contributions each year, so I’m not scrabbling to find the money each April!
Two of my kids have also entrusted me with their savings so they are’t tempted to raid them!
shoestringjane@outlook.com says
So organised, Julia. I have never had one before so working to build it up
Gillian says
excellent idea; i’m going to look into this now – thx for the heads-up!
Laura says
I also read the book mentioned above (Debt-Proof Living), and have kept an emergency account for decades. I had 6 relatives I became somewhat responsible for as they aged, which involved much traveling as I live in the southern part of the US and they were all in the Northeast. The first 18 trips I drove to help, the last 44, I flew. My clan lasted for 17 years! I did try to move back up there, but my job was in Louisiana, kids, partner, and the East coast suffered more in the economic recession of 2007-on. Now I’m trying wholeheartedly to save more for my own aging, so I appreciate everyone’s ideas here.
Kirrie says
Thank you!. The penny has just dropped!. I don,t have an emergency fund. Now mortgage gone have kitchen fund, do up house fund. Retirement extra penny fund but no emergency fund!. So will start when get paid tomorrow!. Would have stolen from other funds if an emergency happened, but so much better to have a designated shit hits the fan fund too!.. Thank you again x