Are you looking for a way to save an emergency fund?
With the rise in inflation, expenses, job insecurity, and living costs, it’s no surprise that having good Emergency savings is essential for any UK resident.
As of February 2023, the United Kingdom’s consumer price index was 127.9, meaning consumer prices had risen by 27.9% since January 2015. It’s essential to ensure you have enough funds to cover any unexpected costs or a loss of income.
According to recent reports and data, Inflation Rates in the United Kingdom reached a 41-year-high of 11.1 percent in October 2022. This means the cost of everyday goods and services increases, making it harder for people to save money.
This is just one of the reasons why having an Emergency Fund in place can help protect you from financial hardship in these difficult times.
So, how much emergency fund should you have in your savings goals? Read on to find out.
What is an emergency fund?
An emergency fund is extra money you should set aside which can give you instant access of money in case of unexpected circumstances.
Having an emergency fund can help you in the long run, and the rule of thumb is to set aside enough money which can cover 3 to 6 months worth of expenses.
Also, it’s better to have a secure savings account that you can access when needed rather than relying on your credit card balance or going for debt options like payday loans, personal loans, etc.
Unexpected financial obligations an emergency fund covers
An emergency fund should be used to cover any unexpected costs that you may not have planned for, such as:
1. Emergency home repair:
An emergency fund can help cover the costs of severe home repairs and ensure you’re not stuck in debt.
2. Medical expenses
Unexpected medical bills can be costly, and having an emergency fund to cover such expenses can help you save much money.
3. Car troubles
Car breakdowns and repairs are often unexpected, and an emergency fund can help cover costs.
4. Job loss
If you suddenly lose your job or face a reduction in income, an emergency fund can help cover expenses until you find another source of income.
5. Utility bills
Unexpected utility bills can often arise, but having an emergency fund can help cover these costs and ensure you’re not stuck in debt.
6. Holiday & travel expenses
An emergency fund can help cover any unexpected holiday or travel expenses you might not have planned for.
7. Unexpected fees & penalties
Unexpected fees and penalties can arise due to late payments or other issues. An emergency fund can help cover these costs and ensure you don’t get into debt.
8. Temporary stops in income streams
If you have a temporary stop in your income streams, such as freelance work or investments, having an emergency fund can help cover these costs until your income resumes.
9. Pet emergencies
Pet emergencies can be costly, and having an emergency fund can help cover any expenses that arise from pet-related issues.
10. Natural disasters
An emergency fund can help cover any costs associated with natural disasters such as flooding or fires.
11. Delayed income
In the UK, an emergency fund can also be used to cover basic living expenses in case of a sudden change in income or if your wages are delayed.
How much emergency fund should I have in savings?
The recommended emergency fund for UK citizens is £13,500, which should cover you for around nine months. This sum can vary depending on your lifestyle and obligations. If you’re a single person or couple without dependents, you may be able to get away with fewer savings than this.
It’s important to remember that having an emergency fund isn’t only for covering your bills; it’s also for helping you stay afloat when times are tough.
Adjusting the amount of money that should be saved in your emergency fund is essential. Some financial advisors recommend calculating at least three months of living expenses as a primary target for your emergency fund.
You can even use an online emergency fund calculator to see how much you need to save as per your current finances and expenses.
How to start an emergency fund?
92% of UK families said that their cost of living has increased from a year earlier as of January 2023. Creating an emergency fund can be daunting, but with the right plan and budgeting, you can start saving in no time. Here are some tips to help get you started:
1. Set a goal and create a budget
Before you start saving, set financial goals, and decide how much emergency funds you need to have saved. Create a budget for all your regular expenses and any additional monthly expenses such as bills and savings contributions.
With this budget, you can accurately calculate the money you should save for emergency. Research says you should aim to keep around £13,500 for three months’ expenses.
2. Automate your savings
Set up automatic savings transfers from your bank account every month to ensure you stay on track. You can set up a direct debit from checking to savings account.
Automation helps you to save without overthinking, as the money is taken out of your account before you can even spend it. When you don’t have to transfer money into your emergency fund manually, it becomes much easier to start building it up.
3. Start small and increase gradually
Start with a small amount and over time increase your savings as you get comfortable. It is essential to set realistic savings goals that you can achieve to keep yourself motivated. With every small success, you can work towards increasing your savings and growing your emergency fund.
4. Take advantage of tax breaks & incentives
Many different tax breaks and incentives are available for individuals wishing to save for retirement or an emergency fund. Research other options, such as ISAs and pension schemes that can help you to maximise your savings.
5. Diversify your investment
Investing your money is the best way to increase the size of your emergency fund. Look into different investment options such as stocks, bonds, and mutual funds that will help you diversify your portfolio and increase your savings.
6. Monitor your progress regularly
Make a note of where your emergency fund regularly stands so that you can see how much progress you are making. This will help keep you focused on your goal. If needed, adjust your budget or contributions as necessary.
7. Consider investing in insurance
Insurance can be a great way to protect yourself and your family against any unforeseen events. It is essential to review the different types of coverage available, such as health, life, and disability insurance, to determine what type of coverage is best for you.
8. Track your spending habits
Tracking your spending can help keep you accountable and prevent overspending. Cut back expenses, then Set up a budget tracker using budgeting apps or software to monitor how much money is coming in and going out. Stop spending on unnecessaries. This will help you to identify areas where you can save more money for your emergency fund.
9. Pay off your debts before saving for emergencies
If you have debts or any Long or short term loans, it’s best to pay them off before you start saving for an emergency fund. Otherwise, the money you save in your emergency fund could be used to pay off your debts.
Paying off debt will also reduce the interest you have to pay and ultimately help you save more money in the long run.
Best place to keep your emergency fund secure
The following are the best three places to keep your emergency fund secure:
1. Bank
Banks offer high security for your funds. Most offer interest on savings accounts, and you can also set up automated transfers to ensure you stay on top of your budgeting.
2. Prepaid card
In addition to budgeting tools, rewards programs, and fraud prevention, prepaid cards are a great way to save emergency funds. With prepaid cards, you can quickly transfer money to different accounts.
3. Cash
Keeping cash in hand can also be a good option for emergency funds, as it allows you to access your money quickly in case of unexpected expenses. It is crucial to keep the cash in a secure location and regularly check for counterfeits or damage.
Wrapping it up!
An emergency fund is essential to prepare for unexpected events or expenses. Before starting, it’s important to determine how much money you need to save and your timeline and budgeting goals. Once you have set up a plan, several options are available for storing your emergency funds, such as banks, prepaid cards, and cash. With the right strategy, you can ensure your financial future is secured!
FAQs
How long does it take to save an emergency fund?
The time it takes to save an emergency fund depends on your budget and timeline. Building up your emergency fund will be easier if you start saving sooner. Building an emergency fund can take a few months to several years, depending on how much money you can save each month.
How to calculate emergency funds?
To calculate your emergency funds, you should start by inventorying your fixed expenses, such as rent or mortgage payments, monthly bills, and groceries. You should then add up these expenses to determine the total amount you will need in an emergency.
Can I borrow from my emergency fund?
Yes, you can borrow from your emergency fund, but it defeats the purpose of having one. The whole point of an emergency fund is to have money set aside for unexpected expenses or income loss.
If you are facing any unexpected expense then you can definitely borrow from your emergency fund, but borrowing for normal expense can put you at risk of not having enough money available when an actual emergency occurs.
Can a charity have an emergency fund?
Yes, some charities have emergency funds that can help individuals and families in need. Depending on the charity, they may provide financial assistance such as grants or loans to cover expenses like medical bills, housing costs, and more. It is important to research each charity’s requirements before applying for an emergency fund.
How many months’ salary for an emergency fund?
It is recommended to save at least three months’ worth of living expenses to ensure you are prepared for unexpected events or costs. This amount can vary depending on your financial situation and lifestyle, so it is crucial to assess your needs before setting a target amount.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
