When you decide to budget and get your finances in order it can seem that your efforts can be hindered by unexpected bills. You know how it is, you’re full of good intentions, and then the boiler breaks down. So you can’t save anything that month, and you may have to put that unexpected bill on a credit card, and perhaps pay it off over the next few months.
The way to put some space between you and the unexpected is to set up an emergency fund.
1) Decide how much you need
It’s recommended you have around 3 months’ worth of living expenses in an emergency fund. So if your monthly expenditure – rent / mortgage plus all other expenses are £1,000, you should aim to have at least £3,000 saved.
To some this may seem like a huge amount of money, especially if you are a low earner, so maybe £1000 or £500 is more realistic for you. You need to aim for a figure which is realistically going to cover the cost of most emergencies.
2) Make a Plan and Start Saving
Whether you’re building an emergency fund for yourself or your family, make sure you have a clear plan.
If you are creating an emergency fund with your partner you need to agree what you consider an emergency and when you would use the money? Examples could be:
- redundancy
- medical bills
- car or home repairs
The next part of the plan is to decide how much to save and how long will it take to reach your goal? It helps to keep an end date in mind to keep you on target!
Tip: create a separate savings account for your emergency fund so you’re not tempted to spend it!
A good way to stick to the plan is to set up a standing order to transfer money into the emergency fund account each month. If you set it up to go out of your account on the day you get paid, you’ll remove the notion to spend it on anything else.
You can also put more money into your fund whenever you want. If you’ve got leftover money at the end of a month, why not add it to to the emergency fund? It’ll help you reach your goal quicker!
3) Where to keep it?
An emergency fund is money you may need to get at very quickly, so you should not keep in some kind of notice account, or invest it where the balance can go up and down in value. Instead, keep it in a bank account, but separate from your main current account like we’ve mentioned. Get an internet savings account, or a Cash ISA – somewhere you can get your money easily and quickly!