First up, what the heck is an emergency fund? Well, put simply it’s money you’ve saved up in a separate account to pay for those nasty surprises life occasionally throws at us – like losing your job, the roof caving in or when the car takes its last dying breath.
A 2015 survey* by the Money Advice Service, which polled over 5,000 people in the UK, revealed that four in ten adults have less than £500 in savings. Another study* by ING Bank, cited by the BBC in March 2016, suggests that nearly one-third (28%) of UK adults have nothing at all to spare in the bank.
Admittedly, it’s not a terribly exciting reason to save, but it does mean you won’t have to hit the panic button, get into debt or revert to the old plastic.
How to start an emergency fund
Consult the old budget. First things first, you need to work out how much you can afford to put away. Even a small amount will be better than nothing if a disaster strikes.
Save after payday. Get into the habit of saving each month, straight after payday. That way you’re less likely to miss it. Think of it as another tax – but a nice tax you get back in the future.
Aim for three month’s cover. The Money Advice Service suggests saving three months of living expenses to give you some decent breathing space to recover from an emergency, such as losing a job.
Choose your savings account carefully. You could take advantage of the tax-efficient savings offered by a cash ISA, but take care when making your choice. The rates might be higher on fixed-rate ISAs, but with an easy-access account, at least you can get your hands on your money if and when you need to.
Be aware some accounts might impose penalties for withdrawing at short notice – an emergency unfortunately rarely gives you 90 days’ notice.
And, as your emergency fund grows, so does your peace of mind. Sit back and be smug knowing that the chances are you’ve got it covered.
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