I’m just going to come out and say it. You need an emergency fund. For real*. Not just in the hypothetical sense of “oh, it really would be prudent of me/us to have some money put aside just in case something were to go wrong”. In the actual “we need to take control of our finances our ensure we have enough money to live on should a mini disaster hit our lives”. This is absolutely, unequivocally serious stuff.
I don’t like being told what to do with my life. The flip side of that being, I wouldn’t dream of telling anyone how to live their life. You want spend a £5,000 inheritance on a shrine for a fictional TV soap character, you go right ahead. It’s your life.
This guy actually did that if you were wondering.
I think I’m within my limits to say, however, that that is a monumentally stupid idea. I won’t tell you how to live your life, but I will say that when you’re unemployed and are handed £5,000, spending it on memorabilia for a fictional TV character probably isn’t the wisest move.
Why You Need One
Anyway, enough digression. Why exactly do you need an emergency fund then? You need one simply to ensure you’re protected from the nasty surprises life often has a way of doling out.
You or your partner could lose your job with little to no redundancy payout; your tooth could crack and you end up needing a filling/crown/extraction; your trusty car could need a new handbrake/clutch/radiator/tyre(s) [delete as appropriate]; your roof could suddenly spring a leak, your oven could blow up, you could experience a storm damaged fence or guttering; unexpected travel for a family emergency or funeral could arise.
All of these things (and more) are things we never want to happen, but are completely within the realms of possibility. Life doesn’t come with a script but it’s important to be protected from unexpected financial events.
So how much do you actually need? Being prudent, 6 months’ worth of essential living expenses. Meaning enough money to cover essential bills and food to eat. Being realistic, 3 months essential living expenses is a very good start. So, if you’re essential monthly expenses are £1,000; £3,000 is a decent start but £6,000 is a preferable target.
How To Get An Emergency Fund
I understand the task of amassing an emergency fund can seem overwhelmingly daunting, particularly when there’s little to no spare money left at the end of each month. All the more daunting, I suspect actually seeing those numbers written down. £6,000 is a lot of money. However, what I think is even more daunting is the financial difficulty you could face when something unexpected happens.
Getting into your overdraft, putting a large amount on a credit card or obtaining a payday loan can leave you facing the cost of the emergency plus (potential) fees for unauthorised use of your overdraft, credit card interest or loan repayment interest (particularly where the payday loan cowboys are concerned). You’ve now taken 2 huge steps backwards and are in the even more precarious position of what to do if something else were to happen.
How can you work towards amassing an emergency fund?
I know what you’re thinking. It’s all well and good her saying reduce spending to start building an emergency fund but in reality, when there’s no money left out of the paycheck each month, is that even possible?
We don’t necessarily have complete control over making more money but we do have control over spending less and having less material possessions.
Look hard your outgoings and see if there’s any areas to reduce spending.
- Reduce grocery costs – switch to own brand goods or switch stores completely. Moving to Aldi or Lidl from Tesco or Sainsburys can help you get costs down.
- Stop all takeaways/restaurant meals. In fact don’t buy any food out of the house. That includes snacks/lunch at work.
- Switch to a cheaper mobile phone tariff.
- Switch and fix your energy costs.
- Get rid of Sky/cable/paid for TV.
- Eliminate your daily Starbucks.
- Don’t buy yourself any new clothes or if you need something, look for it in a charity shop/thrift store instead.
- Spend less on birthday presents. This might sound mean but even £10-£15 less on your spouse/child is welcome money for the emergency fund.
Do the 365 1p challenge. You save 1p the first day, 2p the second day and so on. You can amass £667.95 in a year with this challenge – a pretty healthy looking sum for the emergency fund!
Do a grocery challenge. Be it the £50 a week challenge or something you make up (maybe a vegetarian challenge if you’re a meat eater as we all know meat costs can quickly add up). Anything that gets you spending less on groceries is a winner.
Do a DIY financial challenge. Set yourself a time limit to save £100 and see if you can beat the target.
Side hustle your way to a few extra pounds.
- Get yourself a Topcashback account and start using it before all online purchases. Use it when buying annual insurance premiums too. I’ve amassed quite a few hundred pounds using Topcashback in the past.
- Declutter and have a boot sale or sell items on Ebay.
- Become an Avon lady or mystery shopper.
- Start taking surveys for cash online.
There are ways and means of getting a few extra pounds here and there. These amounts in isolation may not be much to write home about but all proceeds from side hustles can really add up over time and bolster that fund.
Start small, be persistent and don’t give up.
Set yourself small, regular goals and I think you’ll be surprised at how quickly things add up. The first aim could be get to £500. And from there, because I know you’ll be feeling emboldened at having reached that target, aim to double it and reach £1,000.
If you also begin saving on expenses and can start living below your means, you have the happy occurrence of needing less in an emergency because your expenses are lower. When I got my first few jobs as a teenager and into my early 20s, it took me a while to figure out that I didn’t need to spend my whole, entire paycheck that month. Saving a portion of it is the best insurance policy you can have!
Where To Keep It
So you’ve began amassing money for your emergency fund. Great! Now, where to stash it?
We all know that interest rates for savings accounts in the UK are diabolical at the moment. However, you do need to keep your emergency stash somewhere where you can access it quickly. Locking it away for 1+ years to get a teensy bit more interest on it probably isn’t the best idea in this scenario.
Easy Access Saver
For accessibility, an easy access savings account is probably your best bet, even given the atrocious interest rates at the moment. The first £1,000 in interest on your savings is now tax-free for everyone but you should be aware that anything over that amount is liable for tax to be paid (based on your tax rate – basic or higher rate).
Santander 123 account (or other high(er) interest paying current account)
This is actually a better option interest rate wise than a savings account as it pays 1.5% interest on balances up to £20,000. You also get cashback on bills/direct debits, which you could use to bolster your emergency fund further.
This option is not so great if you want to segregate the emergency fund away from you normal monthly money and there is also a monthly charge to the account.
There is always the option of saving in an ISA, which will give you the teensiest bit more in interest than an easy access saver. The only problem here would be if you did need to take any money out in the year, you wouldn’t be able to put anymore in if you’d already reached your ISA allowance for the year. This is also a great option for when you have a really healthy looking fund, as money in an ISA is tax free.
Practice What I Preach
I’m glad I didn’t write this 6 years ago as until we were married, we never had an emergency fund. We were young, carefree…. and broke! We did save for things we needed but we definitely didn’t save for the unexpected. We were simply unaware of the concept of an emergency fund so it wasn’t even in our consciousness to understand the need for one.
But just to show you life can kick you in the balls when you least expect it; a month before we got married our car broke. I can’t even remember the exact problem, just that it cost £800 to fix. And we couldn’t even leave it until after the wedding as we were getting married 5 hours away from where we lived. We were also flying out of the country on honeymoon 5 hours away from the wedding venue. So, 10 hours of essential driving mean sucking it up and paying for the fix on our credit card.
As the breakdown was so close to the wedding, the £800 actually appeared on our credit card statement after we got back from honeymoon and we were able to pay it off in full once we got paid at the end of that month. It was a wake up call though. Had the timings not worked in our favour, it would’ve been a lot trickier to manage. We started saving immediately for 6 months living expenses/an emergency situation and will always keep a stash of cash ready should the unexpected ever arise.
Planning for the worst isn’t the most fun thing to do but it is prudent and can take the pressure off when something does go wrong.
*(If you have debt and aren’t sure whether it makes sense to pay that off or save first, the ever wise Martin Lewis has a great post on that specific topic).