the magic of having an emergency fund

I am sorry to say – but unexpected things often happen in life. The worst thing is – not all of them are pleasant. This is where having an emergency fund becomes vital.

I have personally realised how important it is to have one when I lost a job back in the days. Thanks to the cash I had in my bank account – the next couple of months were a lot less stressful then they otherwise would have been.

While there is no clear and simple answer as to how much you need to put aside for the rainy days – I will try to give you my perspective on this topic. It will be up to you to decide what makes the most sense to you individually.

why do I need an emergency fund?

As I said above – emergencies can happen to any single one of us. There are many things in life you can’t plan and predict. That’s where having some cash put aside can come in handy.

You might think that your employment is really safe right now. That’s exactly what majority of people believed in just before COVID. The next moment – many things in life changed.

The scary stat I found on this topic – over half of the UK populations has not enough money in their emergency savings. If you want to read the short article on this – you can find it here.

Could you sleep well if you were to lose your job and on top of that your boiler and your car broke down? Unfortunately, for many people the answer to the above is NO. No surprise, the main reason to that is their financial concerns and the resulting stress.

Having an emergency fund can significantly improve the quality of your life. This is especially true in those situations that you can’t plan for.

One thing I would add though – if you currently have a high debt, prioritise paying that off over creating a massive emergency fund. Build a little emergency fund. Emergency fund will give you no returns (or very little) while debts will be draining your accounts significantly. You can read an article on how to start clearing your debt here.

how big should my emergency fund be?

While most people close to financial world agree that having an fund is a must – there is no consensus on the size of this. The figures stretch all the way from £500 to £2,000 and even £10,000.

My personal view is somewhat different. No specific amount is going to work for any given individual. I believe that this should depend on your personal circumstance and your “can’t live without” expenses. This is something you will be the best person to know the answer for.

I would suggest aiming for 3-6 months worth of expenses that you can’t cut out. This will include things like mortgage, bills, groceries, etc.

If you know that there is no way you can live on less than £1,500 per month – save £4,500 to £9,000 in your emergency fund.

The above amount should give you enough time to get your life back on track if the unexpected happens.

when is it alright to use your emergency fund?

Once again, this will be more of a guide than a rule. This will depend on you personally and what makes sense to you. In my view, the money here should be used for real emergencies.

What I mean by the above are your mortgage payments as an example if you lose your job. Making sure you can repair or replace your boiler in case it brakes down.

There is a bit of grey area here as well. Some would argue that repairing your car should not be covered by the emergency fund. I would however say – it all depends how you use it. If you only pick the keys up once a week on Saturday to go and play golf – this in my view isn’t an emergency. If however, your job and income depends on it – that’s an emergency for sure.

You will need to apply a bit of common sense here in order to decide what is an emergency and what isn’t. No one else can tell you what is important to you. 

where do I keep my money?

Most people will agree – you should keep this outside of your regular account. The key however – the money has to be easily accessible.

One option is – open a separate current account for this and keep all the money there. There will be a slight barrier for you to actually use the money compared if it was store in your regular account. You would have to proactively decide to dip into your emergency savings rather than it happening by accident.

Having some sort of friction between you and the emergency fund is the key!

One other thing I would suggest – look into savings accounts. These will normally offer some interest on the money held there. In this way your savings account will actually organically grow over time.

Don’t get me wrong – all of these will offer below the inflation interest rate. On the bright side – getting at least something is better than nothing.

how do i easily accumulate it?

There is no magic wand here unfortunately once again. This will really depend on your personality. The below however is what has worked for me.

Setting a direct debit to move money into your savings account on the day you get paid (or couple days later in case it happens on slightly different days of the month).

Firstly, the above helps with getting rid of the issue that you can’t afford to do so. If the money simply gets moved – you adapt to live on what is left in your bank account. Secondly, this makes the whole process a lot easier and pain free. You don’t have to do anything and the system does it for you.

summary

It is crazy to think how an emergency fund can really make a difference to some of us. It is easy to overlook it if you have never ended up in a financial situation that is outside of your control.

A balance between paying off debts and emergency funds is the first priority. Only after the debts are cleared you should fully focus on building emergency fund.

Cover 3-6 months of expenses you can’t live without. This will significantly improve the quality of your life if you find it hard to live with stress.

Find a way for the emergency fund to earn you some interest even if it is way below the desired returns. The idea here is to have emergency savings rather than money that makes you rich.