What is an emergency fund and why do I need one?

An emergency fund is simply a pot of money that you keep specifically for emergencies. It’s not nice to think about the chances of you falling ill, having an accident, or being unemployed, but unfortunately, it’s necessary to think about it if you’ll need to pay any bills or have anyone who relies on your income.

Peace of mind and reduced stress

The stress we tend to feel when we lose our jobs or fall ill generally come from an uncertainty of what will happen next – how will you pay the mortgage, who will feed the cat while you’re in hospital, when will you be able to get back on your feet (metaphorically and literally)? When you have an emergency fund put to one side, you’re able to focus on getting better or returning to work, without worrying about money, bills, or the mortgage.

Think of it as carrying an umbrella – it’s there just in case. If it does rain, you’re prepared!

Good money management

Putting a bit of money aside each month is a sign that you’re managing your money well. In the case of an emergency you’re less likely to turn to costly lending, like payday loans, and instead are able to cover the payments yourself. This prevents you from falling into any debt cycles or taking out any loans that you can’t afford. This is also a great habit to have, as it helps you keep the mindset to save money further down the line and reduce impulse purchases.

Make sure you place the money somewhere where it’s a little more difficult to access it – such as into a current account that you don’t carry the card for, or into a savings account. Try not to lock it into investments or ISAs though, as it’ll be difficult to access in an emergency. Ensure that it’s transferrable with online banking no matter where you are as well, in case you should need to use it abroad in the case of a lost wallet.

How much do I need to put aside?

The amount you need in your emergency fund will depend on your situation, such as how much you earn, how much you have in your outgoings, and how much you can realistically save up to put aside. If you’re self employed or in an industry where being laid off is more common then you may feel that you’re at more risk, so you might benefit from keeping aside more money.

You should ideally have at least 3 months’ worth of expected outgoings, such as mortgage, rent, groceries, bills, healthcare and transport.  This gives you around 3 months to get back on your feet, whether it’s finding a new job, or recovering from an illness or accident. To give yourself more peace of mind, you could keep aside around 6 months’ worth of outgoings. If you want to be prepared for any longer periods, then you may wish to consider taking out some form of life insurance such as critical illness cover or income protection. If your main outgoing is your mortgage payment, then consider taking out mortgage payment protection insurance.

Don’t stress over these figures, though. If you don’t think that you can put aside that much all at once, that’s completely normal. Start small, putting a set amount such as £50-£100 aside each month and slowly build up your fund. In this case, something is always better than nothing.

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