It doesn’t matter who you are, at some point or another an emergency will arise where you need extra money. That might be anything from the washing machine breaking down and needing to be replaced to an unexpected bill or expense that has to be covered urgently. Most people unfortunately don’t save for that rainy day and so instead of dipping into their emergency fund, resort to credit cards or expensive pay day loans.
It really pays to have an emergency fund in place though and can mean any future financial shocks can be handled more easily.
What is an Emergency Fund?
Basically it’s money set aside for if something catastrophic happens. Examples are:
- Losing your job suddenly.
- Unexpected medical expenses like a dental bill.
- Home repairs such as a leaky roof that have to be fixed immediately.
- Replacing household equipment that suddenly breaks down.
Emergencies can be big or small but if you have the funds in place then you’ll find yourself a lot less inconvenienced. With a fund you can lower your stress levels and stop yourself from getting into debt by having to take out a loan suddenly to cover your expenses. While you might be on a tight budget, you may well be able to find room for an emergency fund by budgeting your incomings and outgoings better. You’ll be amazed at the savings you can find when you look a little closer.
How to Build an Emergency Fund
Everyone would like an emergency fund and creating one is not as hard as many people think. Introducing budget planning into your life can help you do just that. It allows you to organise your finances and spot the areas where you can make the significant savings you need. That extra money can then be put aside for when you most need it.
- Be realistic: First of all, if you are building an emergency fund you need to be realistic about how much you can save. That’s why a more focused approach to budgeting can help you pick and choose the way your money handling currently operates and help you introduce methods that will make more cash available for saving.
- Set a target: You need to set a good target for what you may need in the future. For example, if you want to protect against losing your job, how much do you need to cover yourself and your outgoings for the three to six months or so until you find another post?
- Put the money away: Building up that emergency fund capital can be great but it can also be a big temptation. You need to have strict rules for what it can be used for that stop you dipping into the money for convenience sake. It’s also advisable to put the money into another account, perhaps one that earns higher interest, to keep you from spending it.
Everyone should have an emergency fund in place. Even if it’s just a few hundred pounds, this can help to smooth over a variety of situations where you need to find money quickly. Planning for an emergency fund also makes you more aware of how you handle your finances and can lead to better budget planning and financial health overall.