Emergency Fund

It is always useful to put money into an emergency fund every month. There are two main reasons for this; unexpected loss of income and unforeseen expenditure such as car and home repairs or illness. Particularly if you have a young family whom you are financially responsible for, having an emergency fund acts as a buffer in times of need and gives you the breathing space you need to get back on top again.

The amount of money put aside in the case of an emergency will differ between different people. Larger families will need to budget more to cover higher expenditure than someone responsible for only themselves. Additionally, it’s important to recognise that should such a situation arise whereby you need to use the fund, as little as necessary should be used, so that it can be replaced easily. The idea is to see it as a buffer, not an opportunity to go on a family holiday!

When calculating a realistic amount, take into consideration the following things; ‘non-negotiables’ and ‘not-necessarys’.

‘Non-negotiables’ are your household bills that need to be paid monthly to ensure you maintain your repayments and do not put yourself at risk of accumulating debt. Your rent/mortgage, electricity, gas and council tax are just a few examples of these. To begin, the fund should cover these entirely.

Your ‘not-necessarys’ include things like the magazine that you have on subscription that goes out of your account monthly by Direct Debit. Should you find yourself in financial difficulty, sit down with your bank statement and cancel anything which is not a ‘non-negotiable’. Your emergency fund should only be used to cover essential costs. All can be put back in place once you are financially stable again.

In the event of loss of job, it is recommended your emergency fund covers you until you can find another. Your fund should be equivalent to approximately two months of your wages, giving you 8 weeks to start earning again, although some people prefer to have more and others not so much. Just remember the more you have available, the more financially secure you will feel.
Finally, consider keeping your emergency fund in a cash ISA as they generally have higher interest rates. This way your fund will increase whilst it’s sat doing nothing! Most only allow you to withdraw or transfer money a couple of times a year without penalty, so you will not be able to use it as you would your current account. Do your research and find the ISA which is best suited for you and your situation. Start budgeting for your emergency fund today.