Why You Need an Emergency Fund

Emergencies are part of life. You could be minding your own business, doing your own thing and then BANG out of nowhere life throws you a luge lemon and asks you to make lemonade without so much as giving you a knife to cut said lemon with.

These unexpected lemons a the reason why every adult needs an emergency fund. Seriously, they are of paramount importance. (oo I fee l so fancy, I said paramount Hehe)

An Emergency Fund is money that you have stashed away specifically to cover you in the difficult unexpected times of life. Look at it like having the tools ready to make lemonade anytime that life decides to throw you a lemon. Please do not spend it on anything that IS NOT AN EMERGENCY!

Emergencies can range from something unexpected happening to you  – like the car you need to get to work breaking down beyond repair or losing your job or the house flooding – to the more severe instances where the lives of the people you love and care about are in danger – think things like serious illness or disaster.

In these situations, MONEY IS THE LAST THING YOU WANT TO WORRY ABOUT! you want all your energy and mind-space to be focused on being there for the things/people who matter in your life. You never want to be in the position to think “oh no! how will we financially survive this day, week, month, year.” Having a sufficient emergency fund will mean that hopefully in an emergency, money will be at the bottom of your worry list (its rightful position).

An emergency fund is your umbrella in the rain. Your parachute, your gas mask, your….(insert useful safety gear here). It does not stop the disaster, it simply insulates you for the time being and buys you some time in which you can think, re-calibrate, make a new plan, find a new normal and carry on with your life.

The Correct Amount to Have for an Emergency Fund a.k.a Rainy Day Money

Experts in the personal finance world advocate that having 6 – 9 months worth of your monthly expenses stored away constitutes a fully funded Emergency Fund. After running your numbers and facing the figures, this can often be a huge figure and the thought of having to save that much may be terrifying. It is also scary if like me you feel like you have been financially illiterate for your entire adult life and have consistently been £20 away from financial ruin.

Have no fear, I’m here to help. The best way to start anything is with simple steps. I have come up with a goals based method of starting and maintaining a Rainy Day Fund that I think will work for everyone. We do it step by step.

The following steps are saving targets that serve as a road map to ultimately having a fully funded Emergency Fund. For each of these goals, please select a reasonable time to achieve this. Don’t give yourself too much or too little time.

Step 1 : Save £1000

If you are starting from £0.00 in your fund, then this is a brilliant target. Not only will it buy you some proper time if you find yourself in a bind, it is also a nice round figure that looks & feels great. Trust me! Saving your first £1000 is a huge achievement that makes you feel wonderful. Do This as fast as you possibly can. I mean throw all your extra cash in the pot. The sooner you get, here, the better.

Don’t stop (get it, get it) until you reach this mark. Then when you do reach it, do a victory dance because you are on your way to successfully #adulting with your money!

Step 2: Top it up to 3 Month’s Worth of Expenses 

The target for this stage is to boost your savings to the level of 3 month’s worth of core expenses. These are your priority bills and expenses that you MUST pay each month in order to survive, like rent, council tax, child care, food, utility bills, transport etc. Things that are optional like eating out, gym membership, Netflix and extra internet on your smart phone etc. are not included. Step 2B & 2C: Lift this amount to 6 months worth of core expenses and then 9 months worth.

Step 3: Save 3 Month’s Worth of TOTAL SALARY

 The target for stage three is to work towards having a fully funded Rainy Day Fund. You have done well in establishing the first two stages and its great that should something happen to you, financial disaster will not be imminent. Think of it as having a skeleton, now its time to put some meat on the bones. Calculate the amount of money you earn in 3,6 and 9 months, these are your new targets. Save enough to cover 3 months of total salary, then lift it to 6 months and then 9 months. If you like a real challenge, use your gross pay figure ( this is your earnings before Tax, National Insurance and Pension or any other deductions are taken).

That’s it! According to financial experts, once you get to this point you are safe. Should life throw lemons at you, you will be ready with your Nutri-Bullet to make lemonade or a lemon smoothie if you are really fancy.

If you are up for it, carry on with the challenge and save 1 years worth of salary.

Please note, your emergency fund should be easily accessible – so you don’t have to jump through hoops to get to it. Place it in an account where you can earn interest on it but it’s also readily available for withdrawals with no charges. The last thing you want is for a bank or institution to charge you for access to your own money in an emergency.

 

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