How much should you have in an emergency fund? And what are the benefits of having a financial safety net? Let’s find out.
Alright, buckle up and get ready for a wild ride because we’re talking about the benefits of starting an emergency fund and how to do it. And trust me, you’re going to want to stick around because hopefully it will motivate you to build up your financial safety net.
Disclosure: There are some affiliate links below and I may receive commissions for purchases made through links in this post, but these are all products I highly recommend. I won’t put anything on this page that I haven’t verified and/or personally used.
What is an emergency fund?
First things first, what is an emergency fund? Well, it’s pretty much what it says on the tin – a stash of cash that you set aside for those unexpected expenses that can pop up at any time. Maybe your car breaks down, or your pet gets sick, or you suddenly have to replace your entire wardrobe because you spilled coffee on yourself (hey, it could happen). Whatever the case may be, having an emergency fund can help you cover those unexpected costs without having to resort to maxing out your credit card or begging your friends and family for money.
Now, I know what you’re thinking. “But Susie, I don’t have enough money to set aside for an emergency fund!” And I hear you, I really do. But let me tell you something – you don’t need a lot of money to get started. Even if you can only afford to set aside £5 a week, that’s still better than nothing. And who knows, maybe one day you’ll be able to increase that amount to £10 a week, or £20 a week, or even more.
So why should you bother setting aside money for an emergency fund in the first place? Well, let me give you a few reasons.
Why should creating an emergency fund be a top priority?
It can save you from financial disaster
Let’s say you don’t have an emergency fund and your car breaks down. You need it to get to work, so you have to get it fixed right away. But you don’t have the money to cover the repairs, so you have to put it on your credit card. And because you don’t have enough money to pay off the balance right away, you end up paying interest on that debt for months (or even years) to come.
But if you had an emergency fund, you could use that money to pay for the repairs and avoid going into debt. Sure, you’ll have less money in your emergency fund, but at least you won’t be paying interest on your credit card balance.
It can reduce stress and anxiety
Let’s be real – money problems are an effing bummer. When you don’t have enough money to cover your expenses, it can feel like the weight of the world is on your shoulders. But having an emergency fund can help alleviate some of that stress and anxiety. Knowing that you have a cushion to fall back on can give you peace of mind and help you sleep better at night.
It can help you achieve your financial goals
When you have an emergency fund, you’re less likely to dip into your savings for non-emergency expenses. This means that you’ll be able to make progress toward your financial goals without getting sidetracked by unexpected expenses. Maybe you want to save up for a down payment on a house, or pay off your student loans, or take a dream vacation. Whatever your goals may be, having an emergency fund can help you stay on track.
How to build a financial safety net
So, how do you actually go about setting up an emergency fund? Well, here are a few tips to get you started:
1. Figure out how much your emergency fund should be
The general rule of thumb is to have at least three to six months’ worth of expenses saved up in your emergency fund. This means that if your monthly expenses are £2,000, you should aim to have £6,000 to £12,000 in your emergency fund. Of course, this is just a guideline – you may need more or less depending on your individual circ*mstances., but this is a good place to start if you have no other parameters.
2. Budget for it and track your actual expenses
If you know me, you know how much I enjoy harping on about the importance of setting up a budget for yourself/your household. It can be lifesaving, and I’m not even being hyperbolic: your life can actually change for the better if you get on top of how to spend your money, and most importantly, how NOT to spend it.
I wrote an article about setting up a budget and expense tracker: I recommend looking into this if you would like a more mindful way of keeping track of your expenses and comparing your actual spend to your budget.
3. Start small
As I mentioned earlier, you don’t need a lot of money to get started with your emergency fund. Even if you can only afford to save a few quid a week, it’s better than nothing. You can always increase the amount you save over time as you get more comfortable with the process.
4. Make your emergency fund a priority
One of the biggest challenges of starting an emergency fund is making it a priority. It’s easy to get caught up in day-to-day expenses and forget about the importance of setting money aside for emergencies. But if you want to be successful, you need to make it a priority. Set a goal for yourself and make a plan to achieve it, and keep your eyes on the prize as you get used to spending less.
5. Automate your savings
One of the easiest ways to save money for your emergency fund is to automate your savings. This means setting up a recurring transfer from your current account to your emergency fund. You can set it up to transfer a certain amount of money each week or each month, depending on what works best for you. By automating your savings, you’ll be less likely to forget about it or spend the money on something else.
6. Use Plum to achieve your savings goal
If you need an extra hand to build up your savings, you should download the app called Plum. It is only available in the UK (for now), so if you are based in the United Kingdom, I can’t recommend it enough.
With Plum you can set up automatic savings transfers from your bank account into Plum’s interest-generating savings accounts, and you can even have it saved in an investment fund of your choice: make your money work for you!
Plum has a clever algorithm that is able to estimate how much you can afford to save every week, and it automatically transfers it in you saving pot/s on a weekly basis.
I love it, and I would absolutely recommend you start using it if you are serious about your savings goals.
7. Keep your emergency fund separate
It’s important to keep your emergency fund separate from your other savings and current accounts. This will help you resist the temptation to dip into it for non-emergency expenses. Consider opening a separate savings account specifically for your emergency fund, and once you have transferred money into it, forget about it. Don’t be tempted by using that money for anything other an actual emergency.
8. Make it fun
Saving money doesn’t have to be boring! You can make it fun by setting up a savings challenge with your friends or family. See who can save the most money in a month, or come up with a creative way to reward yourself for reaching your savings goals. The more fun you make it, the more likely you are to stick with it.
You should also consider setting a ‘no spend goal’ for a month, and deciding on a reward if you are able to stick to it. For example, you might decide to never order food delivery for an entire month: if you are able to stick to this, you can treat yourself to a nice meal (or not! You might save than money, too!).
Final thoughts on why it is important to have an emergency fund
What’s really important is that you stay focused on the wonderful and empowering benefits of having some cash set aside in case of an emergency. This is especially relevant in times of economic crisis and recession, where inflation rises to the roof and we all have a harder time making ends meet: exercising the saving muscle can only be an advantage to you and those who are part of your household. Good luck!
Other articles on saving money that you may like:
- How I Saved £10,000 in Less Than a Year on a Regular Salary
- How to Track Expenditure Mindfully
- 7 Effective Ways to Stop Impulse Buying
