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It can happen to any of us:
You’re ticking along quite nicely (or at least coping) until suddenly the car breaks down, the washing machine springs a leak, the boiler breaks (the list goes on) and you’re hit with an expensive bill to get it fixed.
If you don’t have an emergency fund, rushing around trying to scramble the money together can add to an already stressful situation. You may find you need to take out credit to pay, leading to debt, and then perhaps something else happens and the financial situation gets worse, causing panic, stress and worry.
Start building your emergency fund now.
Why You Need An Emergency Fund (And How To Build One)
― Randy Pausch, The Last Lecture
An emergency fund is exactly what it says on the tin. Money saved up just to be used in the case of an emergency. Savings that are ready to be used in just such a situation. Having an emergency fund can really put your mind at ease, so you know if anything unexpected and expensive happens, you don’t need to panic because you’re already prepared. You can breathe easy.
Maybe you’re thinking:
‘Hang on, it’s not like I can just bung a spare few thousand in a savings account and Bob’s your uncle.’
I get it, me either! But it is possible with a little effort and determination to build up an emergency fund, one step at a time.
How Much Money Do You Need In An Emergency Fund?
This can vary person to person, and a good aim to have to start with is enough to cover a minor emergency such as needing a new washing machine or car repair.
In the long term though, a good rule of thumb is to try and aim for enough to cover at least 3 months of living expenses if it happened that you lost your job and income.
How To Build An Emergency Fund
The first place to start is with a budget. If you don’t already have one, you should definitely create a budget.
In short, pull together a list of all your income, and a list of all your monthly expenses. Get a good idea of the amount you’ve got going out every month.
Then subtract your outgoings from your income to see what you’ve got left each month.
Decide how to allocate your remaining money so that some goes towards your emergency fund, and the rest however you choose – perhaps for entertainment, coffees, going out etc, and some to your regular savings if you have them.
Don’t be discouraged and think that you don’t have enough to be able to build an emergency fund. It might take a little longer to save up for some people than others, but that’s okay. Whatever the amount you have, we’re going to work to increase that so you can increase the amount you’re able to put towards your fund.
Reduce your outgoings
Have a good look through your outgoings and see if there’s anything that can be reduced, or cut entirely.
It may mean changing your satellite TV package to a less expensive one, or perhaps choosing to forgo your TV licence (do you even need one anyway?) in exchange for a Netflix or Amazon Video subscription.
Or it might even involve a bit of a lifestyle change to become more frugal, perhaps looking at ways to save energy at home to reduce your bill or cutting down the amount you buy takeaway food or go out for dinner. Meal planning is another great way to save money on groceries.
There are loads of ways you can lower your outgoings with a few little changes.
Do some automatic saving
If you struggle to work out how much you can manage to save, it might be worth trying out an automatic savings app such as Plum or Cleo. These are clever AI apps that you link up with your bank and they work out small affordable amounts that you can afford, and move them into your savings for you. The idea is that you don’t miss the money (and it really does work, I’ve found it really good.)
You can simply set it up, not think about it and after a few months you should find you have saved a fair amount without even really noticing the difference!
Some bank accounts offer a similar type ‘save the change’ service where they can round up your money and move the ‘change’ amounts into a savings account for you.
Increasing Your Income
If you’re still struggling to find money for your emergency fund, maybe it’s time to start looking at ways to increase your income.
Even if you don’t have much time, there are LOADS of ways to make a bit of extra money from home. Whether you need to fit it around your existing job, or do it around looking after your kids, it’s definitely possible.
Here are some options for earning some extra cash from home:
- Selling or reselling – a great way to kickstart making some extra pennies is to have a bit of a declutter and sell some of your stuff. If you’ve got an eye for what sell, picking up things in charity shops and selling them on for more money can be a good earner.
- Online surveys – a lot of people slate doing online surveys, but I actually love it, as it’s how I was able to earn some extra cash, especially while I was at home with a newborn constantly attached to me. You can do them any time, whenever and where ever you feel like it, and it’s easy.It’s true that it can be pretty poorly paid, but there are some that pay much better than others. These are my favourite and highest paying earners:
- Focus groups/Research interviews – these can often be done remotely from your computer and usually involve sharing your experiences or opinions in either a group or one-to-one setting. They can pay quite well (around £30 for half an hour). The amount you can earn is obviously limited to how many studies are currently available so it’s worth signing up to a few sites to get more opportunities. Good options to try are: Respondent.io, User Tribe, Angel Fish, and People For Research.
There are lots of other ways to earn some extra money from home too.
You can use all the extra money you earn from these side incomes to put towards your emergency fund. (Once you’ve got that in place, you might want to carry on and use them for extra savings or out towards holidays or other treats – I really love having that little extra I can make, it really does make a huge difference).
Where’s Best To Put An Emergency Fund?
The best place to put your emergency fund is probably in a separate savings account to the rest of your money. It needs to be easily accessible so you can get to it as soon as you need it, but not so close to your ‘spending’ money that you get tempted to dip into it for something it’s not intended for.
An instant access savings account is probably the best idea as you can accrue a bit of interest while it’s there.
An emergency fund is a separate savings pot, ONLY to be used in the case of an emergency.
You can find extra money to put towards an emergency fund by reducing your outgoings or increasing your income.
The main benefits of having an emergency fund are:
- Financial security in the event of an emergency
- Peace of mind (being stress free when it comes to a financial emergency can’t be overrated!)
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