Some major expenses can be planned for. Holidays, a big wedding, a home extension are all relatively easy to budget for, because you know how much to budget for and when you’ll need to pay.
But life is not always so predictable.
What if… you lost your job unexpectedly? A downturn or an AI innovation could mean financial turbulence, leading to an unforeseen redundancy. You might find yourself in a precarious financial situation, struggling to cover basic living expenses, pay bills, or maintain your mortgage or rent payments.
What if… your home suffered damage? A severe storm or unforeseen structural issues can leave your home in need of urgent repairs. A broken boiler, rot or subsidence might not be covered by insurance.
What if… your car broke down? If you rely on your vehicle for daily transport, an unexpected repair or the need for a new vehicle can be a significant cost that you have no choice but pay.
What if… you faced a family crisis which meant you had to travel suddenly? Tickets, accommodation, time off work. The costs would add up fast.
Emergencies don’t wait to be announced; they arrive uninvited and usually at the worst possible moment, and they may have severe financial impact. But the main thing to remember is that with an emergency, it is not a question of “if” but “when” it occurs. Building an emergency fund is an essential preparation to reduce the financial impact.
What exactly is an emergency fund?
An emergency fund is a reserve of cash that you can call on at short notice. It does not have to be (in fact, it should definitely not be) a roll of notes stuck under the mattress. It should be safe and secure in an instant access savings account, where you can get at it if you need it, and where it can earn some interest for you.
Experts often recommend saving between three to six months’ worth of your usual income, but the ideal size may vary based on individual circumstances, and the expenses you need to cover. Factors such as your employment stability and how easily you might find another job, your dependents, and their situation and living costs all contribute to defining the size of the fund you need.
So how can you build your fund?
There are plenty of demands on your cash even before you start to plan for the unexpected, but if you realise that an emergency fund is a necessity and not a luxury, you can start to find ways to build it.
- Set clear savings goals: Define a specific target for your emergency fund based on your personal financial situation. Putting away money every month might mean tightening your belt going without some pleasures, but it would be more than worth it if it meant your emergency did not have to be a financial crisis.
- Budgeting and expense tracking: the best way to stick to those savings goals is to create and stick to a budget Tracking expenses can help identify areas to cut back and redirect funds to the emergency fund. It’s easier if you use an app on your phone to track how you spend, and show you where you don’t have to.
- Automate saving: With some extra cash left in your current account, you can set up automatic transfers into your designated emergency savings account. Making things automatic means you don’t have to remember to do a thing – your bank will do it for you.
Finally, make sure the account you use for your emergency fund offers the best rate of interest. Having money that grows faster with no effort from you means that you will meet the goal for your emergency fund faster.
The best way to find the provider offering the most competitive rate on an instant access savings account for your emergency fund. Simply call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or a recommendation to a particular saving strategy you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate deposit accounts.
