An emergency fund is one of the most important things that you need to have to manage your personal finances. It is something that will help you when or if you are suffering from financial problems, or if you are trying to ensure that you do not have financial problems.
What is an emergency fund?
An emergency fund is a pot of money that you have saved for emergencies only. An emergency is something like you losing your job, your business going under or your family experiencing financial difficulties. It can be anything from 1 month of cash to keep you going, 3 months or 6 months. Most people opt for 3 months because 90 days is enough time to change a situation that you are stuck in.
Take a look at the critical 5 reasons why you need to have an emergency fund
#1 – Protects you from uncertainty
The recession of 2008 taught us that nothing is certain in the economy, especially when it comes to jobs. Whether you have a job that you love or you are trying to start a business, when the economy goes down, you could lose everything. It’s critical to protect yourself from uncertainty. An emergency fund does exactly this. It insulates you from the things that are going on within the economy and it gives you a much needed cushion that you need in order to survive.
#2 – Emergency funds can be used for bereavement
Bereavement is something that affects us all. Whether it is a close family member or a distant relative, when you are bereaved, it can change your life especially financially. Imagine how you would feel if you lost someone close to you and you cannot help financially? Worrying about money during bereavement is something that can completely ruin someone’s life. It does not have to be this way. Use an emergency fund to ensure that bereavement does not affect you financially
#3 – If you lose your job, you can use it to pay bills
No one wants to lose their job. If you do lose your job, you need to have a contingency plan to avoid falling into severe financial hardship. One way of avoiding this completely is by having an emergency financial fund that you can tap into so that you can live off this money. For example, if you lost your job, if you have a two month emergency fund, this means for 8 weeks you will have enough cash to sustain yourself. This means paying your bills and having food to eat. It’s really important that you are able to pay your bills so that you can sustain your lifestyle. Your emergency fund will help you do this if something happens that affects you from being able to work effectively.
#4 – Emergency fund stops financial snowballs
If you have an emergency fund, it will make it easier for you to stop getting into financial traps such as constantly borrowing money. There is nothing wrong with borrowing money when you need it and paying it back. What needs to be done is you must only do it in the short-term to fix any problem that you have. For example, an emergency fund would stop you from borrowing money from friends and family because you know that you can take care of your needs with your fund.
#5 – Emergency funds are liquid
The word ‘liquidity’ is used a lot in finance. This means that it can be withdrawn at any time in cash. This is money that is in your savings account and current accounts. You need to consider to save as much as you can in liquid accounts so that you can withdraw it at any time. The National Savings & Investments (NS&I) said in 2015 report that Brits were saving more money in 2015, compared to other years in the run-up to Christmas. This highlights how more Brits see liquidity as something important that they need to aspire to.
How can you build an emergency fund if you are low on cash?
Building an emergency fund when you are low on cash does not have to be something that is difficult. You need to follow some key rules on how you can get there and soon enough you will have an emergency fund that you are proud of.
Step 1 – Save what you can
You might think that you have saved an insignificant amount by saving even £2 but it is not insignificant at all. If you can save even £10 per week, that is £40 at the end of the month that was not there before for your emergency fund. Try and get into a schedule of weekly saving with any amount but keep it consistent. Tell yourself any amount that you save weekly is only meant to be used for your emergencies.
Step 2 – Use standing orders from your account to save
If you think that you can’t trust yourself to send the money to your saving account straight away, ask your bank to make a standing order to your account so when you get paid immediately it goes to your saving account. This way you do not miss the money at all because you have not budgeted it anyway, it goes straight to your emergency account.
Step 3 – Tell yourself you cannot use your emergency fund for something else
One of the most important things that you can do is that you cannot use your emergency fund for something else! It’s all too tempting to tell yourself that you should ‘treat’ yourself to saving so much to a new jacket, a weekend break or an expensive meal with your friends. Be vigilant with yourself in order to protect yourself for a rainy day. You never know when you will need to use it.
By building an emergency fund, you will be able to take control of your finances and give yourself the peace of mind that you have always been looking for. Start building an emergency fund today, not just for your current needs but for your future.