Emergency Funds

I am a big fan of having emergency funds (or savings for a rainy day). You will sleep so much better!
The FCA* states that 1 in 10 adults have no savings and a BBC survey revealed that half of twenty- somethings have no savings.

Emergency funds is a savings pot reserved for life’s emergencies:

Less/no/lower income
You lose your job.
You are self-employed and have a month with fewer clients, orders, assignments and need money to bridge over.
You get il and have a reduced income

Higher expenses
Your car breaks down and needs repair, your computer/washing machine/etc. dies and you need a new one.

To determine how much you should save into it, consider this:

  1. Know your essential bills and how much this amounts to. See here how to approach this, if you are not sure.
    I count in there everything that you cannot reduce to 0 right away, even if not “essential to survive” (e.g. a dog insurance).

    Essential bills may be
    • rent/mortgage
    • gas/electric
    • mobile/internet
    • monthly paid insurances (e.g. pet insurance)
    • Council tax
    • food (I use an average value)
  2. Think about how much else you need to be happy and add this amount. That might be a little budget to travel (train, tube, petrol) or a night out every once in a while. Add this to your essentials sum.

    The bare minimum for our family for example is £1,700. Even then it is possible to tinker with the food budget and make the money go a bit further.
  3. How many months do you want to have covered? Recommendations range between 3-6 months, but only you can answer this. If you rather risk-averse and don’t want to be pushed into decisions, a bigger funds makes sense. But even just 1 month or a couple of hundred £ will give you time to think about next steps and bridge over shortfalls.

Save your funds it into an online savings account you can always access.
If you take money out of there, once you are back on your feet, make sure to fill it up again.

Saving up for emergency will always conflict with saving for “nicer” things, like holiday or other goals you might save up for, but disaster can always strike and it is best to be prepared.
I experienced many of the above scenarios, my role was made redundant twice, I was seriously ill and unable to work for a while and now we are in the middle of a pandemic. Good to know there is something to fall back on.

*FCA – Financial Conduct Authority

Rainy day? Have an umbrella ready!
Picture by @carolinna_pt

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