Why We All Need An Emergency Fund And How To Start One

Money, it’s the bane of most of our lives. Most of us probably don’t maximize the money we get as much as we can. And I’m sure we could all do with a little extra in our back pocket. Over the years I’ve had a mixed relationship with money. At some points, I was spending like crazy without the income to support it. I made the most of my final year’s university loan even though I lived at home and spent less than 10 hours a week at university. But that quickly changed and now I am a massive saver.

Today’s post is all about emergency funds; what they are and why you should have one. But of course, we all know this can be easier said than done. While you’re saving for a fund, or once you’ve needed to spend it you may be left in a tight spot. But there’s always an alternative like Polar Credit who are there to help responsible borrowers. They have much lower fees associated with their loans than payday lenders. They offer a credit line so you know how much you can borrow, but you only pay interest on how much is drawn out. And not the total credit limit agreed. You can borrow from as little as £25 so it could just be enough to top up your emergency fund if you don’t quite have enough. Plus if you use it in the right way it can help rebuild your credit score.

What is an emergency fund?

An emergency fund is a sum of money which you save and don’t touch in case of an emergency. Life is unpredictable and most of the things life throws at us costs money. It could be that your car breaks down and needs urgent repairs. Or your boiler breaks at home and you need hot water to live (don’t we all?!) Or you have family abroad and urgently need to go and visit them.

For most of us, we don’t happen to have loads of spare money in our current accounts to pay for emergencies like these. But if you plan an emergency fund you should be covered if something unexpected happens. Plus with an emergency fund at home, it will help prevent you from getting into debt. Most things we’d class as emergencies you’ll need to pay to do somehow. And if you’ve not got the money saved you may be tempted with a payday loan or high-interest credit card which isn’t great for your savings or credit score.

Having an emergency fund as well is real peace of mind that you’re covered if you need something. Too many of us stress and get anxiety around money issues. But having something to fall back on if things get tough should help alleviate the pressure and worry.

How much do you need in an emergency fund?

Financial experts say that emergency funds should contain between 3 and 6 month’s worth of living expenses. So for example, if you (or your partner) lost your job tomorrow, you’d have enough money to live on for this amount of time.

The funds you have needs to be enough to cover any large emergencies you may have. But this will depend on your living expenses and how much you earn. But at the end of the day, anything you can save for an emergency fund is better than nothing.

How do I get started with an emergency fund?

The first thing to do is set up a separate bank account to hold your emergency fund in. It’s no good having it in y0ur current account as you’ll be too tempted to spend it. Or at least I would. You can look into instant access ISA’s which do give you a better rate of interest than standard savings accounts. But it’s worth looking at any Terms and Conditions to see if you need to give them notice of any withdrawals (pointless as you can’t plan for emergencies).

Once you have an account look at your current budget to see how much you can put aside each month. If you haven’t created a budget then check out my post about creating your own personal budget. 

It’s always nice to start your emergency fund with a lump sum, but either way set up a direct debit to come out of your account just after payday. This way you won’t notice it coming out and the payments will be regular. During your savings, if you find you’re not touching your emergency fund feel free to stop when you have 6 month’s worth of expenses or whatever figure you have in mind. Then you can look at saving the money for something else, perhaps a holiday you want to go on, or renovations at home. Either way, once you have your emergency fund set up fingers crossed you’ll never need it.

Do you have an emergency fund?

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