The No 1 Reason That You Need An Emergency Fund
You have a goal that you want to reach, and you’ve started saving money for that goal.
But an emergency pops up.
You can’t afford it – so need to take out some credit to help cover it, and there’s more debt piling up.
Then something else happens. But there’s no savings left – and more debt needs to be taken out to cover it.
Unfortunately, it’s an all too common problem, and if you are following anyone who is a on a debt payoff journey, you may have seen this happen, or had it happen first hand.
It doesn’t need to be this way though.
Here’s the deal:
We can prepare for emergencies. We can have money in the bank ready to cover us for things that crop up that knock us sideways, and pay it without causing any stress.
That’s the goal, right? Less stress.
I don’t know about you, but I hate the feeling of panic, where you know that you can’t afford to pay for the thing that has broken (for example) and you know that you have to pay it, and potentially get into some debt because of it.
I’ve been there – where I had £0 spare cash, and if something came up, I couldn’t pay for it. This wasn’t always emergencies either – if my friends invited me out for a meal, I didn’t have the money to go. It was a really, really difficult time for me.
Now, you’ll be pleased to know that I am in a much better place. I live with my boyfriend and my daughter, and we are in the process of buying a house.
We have spare income, we work hard, and we are secure in the knowledge that we can afford any emergencies that crop up.
The difference in my mental health with financial peace is HUGE – and I want that for you too.
Wondering where to start? Head on over to the Free Resource Library to download the checklist below. It’s for your 52 week money challenge!
Create A Good Budget
Firstly, you need to create a budget. You won’t know how much spare you have each month, without doing a budget first.
Write out all of your income, and then all of your expenses – both fixed and variable. Head on over to your internet banking and bank statements to see how much you have going out each month.
To sum it up, a budget is simply income – expenses = £?
The amount of money that you have left each month will be what you can use for your goals, such as building your emergency fund in this case.
Once you know how much money you have left spare each month, you need to give that money a job. The job can be whatever you want, but it’s a good idea to work to a Zero Sum budget – where you are essentially left with £0 in your account because it all has a job.
That doesn’t mean to leave yourself with no money, but to put your spare money towards things, so that it’s not used for random spur of the moment purchases.
You can use the ‘spare’ money left over bills for things like:
- Emergency fund
- Paying off debt
- Fun money/entertainment
The point is, to make sure that you are allocating yourself money for savings – you could treat your savings like a bill and get it automatically coming out of your account if that works best for you.
How Much Money Should You Have In An Emergency Fund?
This is a personal decision – I’ve seen some people with £100, I’ve seen people with £10,000 or more – it comes down to personal preference and how much money you need to live on.
Emergencies are something that we know will happen – but the kind of emergency, and how much it is…will vary massively from person to person.
Say you lose your job. Would you be ok financially?
If not, it’s good practice to have enough money in your emergency fund to cover you if you were to lose your job.
Even if you were to find another job straight away, most jobs will wait until the following month to pay you, which may mean going without pay for a month or two.
Ideally, you will save 3-6 months of living expenses, so that you are covered in case you lose your job or something equally as big comes up.
How Do I Build An Emergency Fund?
As you’ve created a budget now, you can look at the expenses and run through them, to see which you can reduce.
An example of a good place to start is with your electricity/gas supplier. With these utilities, you are usually just paying for the same service, but potentially a lot more than you could be paying with someone else.
Head on over to a cashback site such as Quidco or Top Cashback, and go through them to the price comparison sites – the reason for this is that you will get some extra money back from this, so it’s a win-win.
Work through the whole list of your expenses, and see what you can reduce.
If you think that you are paying too much for your groceries, the best thing that you can do is a proper meal plan each week, because then you are only buying the food that you actually need, and none of it will go to waste.
I’m a massive fan of increasing income, because when I started to look for ways to increase my income, my life did a complete flip. I had been struggling so much, but fast forward to now – I am doing so well.
If you are wondering how on earth you are meant to earn extra money when you already have a crazy busy life, you’re in the right place.
I started earning extra money in a crazy time of my life – I had a toddler who was permanently stuck to my hip, I had an evening job that I did from home when she was in bed (and also during her nap in the daytime), and I was also studying at University part time from home as well. Ahh!
I had told myself that I was too busy, that there would be nothing that I could do around my daughter and everything else, I didn’t have a car at the time either – there were a lot of excuses that I came up with for quite a while, before I took the leap into the world of the side hustle.
Some of my favourite ways of earning extra money that I 100% recommend for you are:
- Mystery shopping
- Answering surveys
- Matched betting
- Pet sitting (I’ve done this around a full time job!)
- Selling your stuff
- Freelance writing
Just know that it is definitely possible for you to earn extra money, and the day that you start will be the day that managing your money becomes much easier for you.
Save The Change
If you aren’t used to saving money, a really good way to start is to save your change. Get yourself a coin jar and when you have change, put it in there.
You may want to try specific challenges with this, such as only putting in £1 or £2 coins.
Ideally, you would usually want to put all of your change into a savings account that you can accrue interest with, but for now, we will go for the start building good financial habits.
What’s a Good Amount To Start With?
A good amount to aim for in the beginning, would be £500 – £1000. This can cover you for things such as car repairs, or the washing machine breaking down.
The amount that you save per month is up to you and your income/expenses, but if you work to the Zero Sum budget process, a good aim to have is to put most of what is left after paying your bills to your emergency fund.
Remember – your emergency fund is for you.
It is for your own peace of mind.
The reason that you are saving an emergency fund is so that when something bad happens, you don’t have the additional stress of worrying about your finances, and suffering a financial setback.
Where Do You Put Your Emergency Fund?
When an emergency strikes, you’re going to want to have the money ready to go. You aren’t going to want to jump through hoops to get access to it, because that kind of defeats the point.
Ideally, you’re going to want to put your emergency fund somewhere that is easy to access when you need it (so not in investments), but not easy to access in general day to day life.
If your emergency fund is linked to your current account and you can see it when you log onto your internet banking, the temptation to move some of it over is too strong.
The best thing to do, is to keep it in a savings account, but one that isn’t linked to your main accounts. Look for one with a good interest rate, so that you can grow your money whilst it’s in there.
What Counts As An Emergency?
Ok, I know I’ve covered this a bit already at the beginning of the post, but I think that this is an important one to discuss.
It’s all too tempting when you have the money there, to use it. There are loads of opportunities that pop up that you could use it for, but the whole point of having an emergency fund is to take the stress out of your life.
An actual emergency, that you can’t really fully prepare for. So a birthday or Christmas does not count as an emergency, as it happens on the same date every year.
Do you have an emergency fund? How much do you have saved, or want to save?
So incredibly important!!!! Having an emergency fund can be the difference on how you put food on your table, gas in your car, and your lights on at night. I love that you tie in the emergency budget (bare bones budget) I have an idea of what ours would be, but I really want to discuss this with my husband and make sure we are on the same page. Personally, I know we need about $10,000 saved up to be prepared if one of us lost our job. That amount would allow us to pay our expenses and necessities for 3 months. Unfortunately, this isn’t possible in our immediate future but we do have a $1,000 emergency fund right now. The $10,000 is another goal but we have to make choices between paying down debt or building up the $10k so for now we are focusing on the debt.
Such a great post Francesca! I hope lots of people read this one!
Thanks Amanda! So important isn’t it. I think your $1000 emergency fund is really impressive! It’s hard when you have debt, but at least you have peace of mind knowing that you have something there to help.
We do actually have an emergency fund, thanks to my husband who is so organised. He’s the one who thinks of these things, hence the separate accounts (emergency fund, our daughters Uni fund, and we even have a car fund!).
I’m a big fan of separate accounts for different things! 🙂
As a fellow money blogger, I completely agree with this. It’s so important to have some savings to protect themselves if something should go wrong.
Thank you Hannah – it’s so good for peace of mind.
We don’t have an emergency fund but I do think it’s really important that we have one circumstances for us are about to change so we will be able to pay off debts and have an emergency fund, I think 1,000 would be the first goal and build it up from therethere, great post thanks so much really enjoyed reading.
Thanks Marie I appreciate that! I hope it helps you with starting your emergency fund 🙂
Good solid advice. You never know what tomorrow will bring.
Thank you! Best to try and be a little bit prepared 🙂
So good to read a post like this now rather than when it’s too late. The oil crash and brexit fairly taking their toll.
Thank you so much!
I used to have an emergency fund but need to start one up again.
Yes, do it! 🙂
Yes I do. Working on increasing mine. Been dipping in lately. Lovely post.
Well done on having one at least 🙂 maybe move to a not so easily accessible account?
My wife and I built up an emergency fund the past few years. We are sitting at three months worth of expenses. Anything beyond that we have in stocks and I also like to have 1-2 months worth of expenses in our checking account. The toughest thing about emergency funds is getting started and balancing it with debt repayment and other financial goals.
You sound very prepared DC 🙂
It wasn’t always that way! There was a time in my life where I had little to no emergency savings. It took a lot of time and discipline to get there.
Discipline is the key! It can be so tempting to spend the cash bundle, but having the foresight to not use it, is hard to attain.
Awesome post you made the topic easy to understand! Emergencies can be such a bother but the peace of mind is the reason I love this concept.
Thanks Stefan – I agree, peace of mind is the best part of having an emergency fund.
Definitely agree, our emergency fund is one our most important financial tools. We currently have 3 months of expenses saved in there, and it’s growing by $200 (which we add)+interest every month. Eventually we’d love it to be 12 months of expenses.
We prefer to have actual cash, rather than a credit card or something debt related.
That sounds like a great amount Tristan!
I definitely need an emergency fund because an unexpected bill always seems to crop up on me! My other half has one but he’s determined not to touch it until he really has to. I’ve just discovered your blog today and can I just say it’s absolutely beautiful, I love the theme you have 🙂
Sounds like a good idea 🙂 thank you – that is so kind of you! I do love it – but I am a bit biased haha!
I have an emergency find but sadly it wouldn’t stretch far, I do try to keep it topped up though x
At least you have something 🙂
I need an emergency fund because at the moment I have very little money coming in and it is frustrating to deal with.
It is frustrating isn’t it! An emergency fund can bring such peace of mind. I really recommend one!
I have an emergency fund, though it has depleted recently, but it is a good idea to always have one x
Good to hear, Rachel! 🙂
Emergency funds are definitely a necessity. I wasn’t able to find a job after my hubby’s job moved us. Having an emergency fund has been very beneficial in making a less than ideal situation less stressful.
Aw no! Have you found a job now? Glad it helped!
We had an emergency fund which we used when hubby was made redundant. Sadly we have not been able to pay back into it since but it saved our bacon at the time
Aw, I hope you manage to bump it back up – and good to hear that it saved you!
I definitely have a “when shit hits the fan” fund, haha. So important! I hope I’ll never have to use it but it’s good to have just in case!
Haha! Yes it’s good to have it there 🙂
I find those numbers on the number of people who have no cushion to fall back on really depressing. It’s a horrible poverty cycle, you need a new fridge so you get it on HP and it ends up costing so much more than it would have done if you had bought it outright. Just dreadful.
I’m in agreement with you Helen! It is a nasty cycle.
I’m JUST starting on getting my emergency fund back in place after a couple years of not having one. I finally landed a job making decent money, as well with my blog income increasing. I’m trying to make a budget of setting outside $500 a month into it until I have $5,000. We will see how it goes!
That sounds really good Alexis!
Yep, EFs are integral to surviving. Even just shunting $50 a month/paycheck toward an EF will at the very least help your peace of mind.
That said, we didn’t have one when we paid off debt. BUT there was a reason. We were in a unique position where my husband was on unemployment and I was on disability. We had guaranteed income that wouldn’t change (at least, in Tim’s case, for a set number of weeks). So it just made sense to throw every cent at debt. Especially given how many medical expenses were constantly, unexpectedly thrown our way — we’d constantly have been diverting funds to re-up the EF… only to drain it during the month. It was especially important since Tim had a deadline on how long we WOULD have guaranteed income.
But most people aren’t in such a weird position, so an EF is integral.
Ah, yes it is handy if you know exactly how much income you will be getting! It’s different for everyone 🙂
Great point about still having an emergency fund even in debt. The entire cash wad used towards lower interest debt will make someone take on higher interest debt (CC) and therefore it’s better to save some for an emergency. Life happens! Very great point.
Thank you! Great point about the debt having the higher interest.
When I was married my now ex-husband was out of work for 12 months. We had a mortgage to pay, 2 kids etc. It was stressful. I always aim to have 12 months of expenses as my emergency fund. It wasn’t easy to begin with or to rebuild, definitely worth it though.
That does sound stressful! Yes 12 months sounds like a lot, but what a great buffer for emergencies!
Great advice on emergency stash. I am just starting out with paying off my debt. I realized my emergency fund was a actually a bit too large for me. Luckily I was about to use some of it to jumpstart my snowball effect and put a slight sent in my debt. I was also able to save about 6 months ahead!
I am a new blogger but I wrote a post on financial quotes to curb impulse spending. I’d love it if you checked it out! http://kelleyaroura.com/favorite-financial-quotes/
Thanks Kelley! I have checked your blog out 🙂 love the quotes!
Great post. It is so important to have an emergency fund!! Our gas boiler broke and we had to borrow the money so now I save a bit each month for emergencies.. Lovely blog 🙂
Yes, good idea Claire! Thank you!
I’ve stopped smoking and all the money I use to spend is going in to an emergency fund x
Well done Cathy, that’s great!
Scary stuff! We are finally managing to put pennies aside for such emergencies although it did take a long time to get so organised. DEfinitely worthy it.
That’s great work!
I have to admit that we didn’t have an emergency fund but we are starting to build one as it is such an important thing to have some money for those times when you really do need it.
Yes, definitely! Glad to hear that you are building one!
I must admit we don’t have an emergency fund and I think its something we really need to have to fall back on. I’m definitely going to start building one.
So glad to hear that Joanna!
That’s some crazy stats right there. I can’t believe that that’s the case as it doesn’t seem unrealistic to achieve. I guess you can’t put a number on what you should have as an emergency, as you said everyone has different opinions but that’s because everyone has a different lifestyle, needs and those they’re responsible for. I try to save regularly and small amounts – recently it has helped out a lot especially after EON hadn’t charged me for more than a year and then decided to ask for it in one go…
Alina from The Fairytale Pretty Picture
You are so right Alina!
An emergency fund is a must for anyone who is trying to manage their money! Mine saved my dogs life only a couple of months ago.
The best thing is we have managed to build it back up to where it was already.
We don’t own any credit cards so an emergency fund is our safety net and the key to peace of mind 🙂
Aw, that’s so lovely!
Aww man, what a perfect example of a great reason to have an emergency fund!
So sweet isn’t it! 🙂
I had an emergency fund and then used it to pay off a credit card which was both sensible and dumb at the same time, especially when my son ended up in hospital a couple of weeks later, the car broke and my washing machine broke. I got through it all though. I’m currently working to build it back up. Never again.
That credit card has remained clear though. 🙂
Oh no! They do say that bad things always come in threes. Was your son ok??
Fab work on the credit card!