Having an emergency cash fund or emergency savings is an important financial goal, which everyone should have. In this article, I will explain why you need one and offer some practical tips for creating your own.
What is an emergency fund?
An emergency fund is essentially a cash buffer you hold, normally in a bank account. Other names for this are contingency fund or personal budget.
Usually it is recommended to have approximately 3-6 months salary as the fund amount.
Where should I hold my emergency fund?
Ideally in a high interest and easily accessible bank account. So your money works for you whilst you’re not using it. Also you don’t want to be penalised for accessing the fund should you need too.
Why should I build an emergency fund?
This money fund is usually used for any unexpected moments in life or unforeseen expenses such as a car repair or boiler breakdown not covered by any insurance you may hold. The fund will provide you with a sense of security and peace of mind because if something happens to your usual income – you’ll still have money set aside in case you need it.
Another important reason that people establish an emergency cash fund is that it helps them cut down the amount of debt they accumulate as they focus on the saving aspect.
How do I build an emergency fund?
There are certain steps you can follow to establish how much you may need and want to save, everybody will have a different strategy for this.
First of all you could set a monthly savings goal and see what you could spare after all your normal essential monthly expenses or debts are paid.
If you have:
- Credit card debt
- A loan
- Mortgage payment arrears
- Unauthorised overdraft
It may be cheaper for you to pay these off first before saving for your fund.
You could vary the saving amounts, some people may prefer smaller regular saving amounts which can be more effective as you build up regular habits. It may be ideal to set up a savings standing order or Direct Debit to ensure regular saving and so you don’t have to remember to do this each time.
You could even ask for help from family. Start your emergency fund with their help, then it will be easier to start saving the rest of the money.