I do not think I have come across one financial adviser or author yet who has not stressed the importance of having an emergency fund. This is a set amount of savings which will help you pay off unexpected expenses in times of need.
I realised the importance of having one when I recently lost my job. Whilst we can keep afloat with our regular expenses if something big came up we wouldn’t have enough to cover it. It is not hard to start one you just have to spend a small amount of time setting it up.
Change your mindset
For some reason people often think about savings in such a negative way. The key is to change your mindset. Having an emergency fund is a positive thing. It gives you security and peace of mind that if something happens you have the reserves to handle it.
Decide how much
There seems to be a lot of debate over how much you should have in your emergency fund. Most authors advocate 3-6 months’ worth of expenses but some go up to 12 months if you are living in times of economic uncertainty. This is really up to you. Think about how much would make you feel secure and able to tackle anything.
Tally up your expenses
If your ideal amount is based on monthly expenses sit down and tally up absolutely everything you pay for on a monthly basis. This includes fixed costs such as mortgage or rent, insurance, phone, tv etc. Also factor in realistic amounts for food, transport and entertainment. Once you have this times the amount by the number of months’ worth you would like to have in the fund.
Open an account
It is time to decide where to put your money once you have your amount. You need to make sure it is fairly accessible and you might as well have it somewhere that earns you interest. I myself decided to set up a UBank account because not only is it trustworthy, but it is not linked to my regular banking account which means it is easier to resist the temptation to dip into it.
How much can you save?
Think about how much you can afford to put towards your emergency fund each week or month. Don’t be silly about this. You are better off putting in less than more and then drawing on it. Realistically it could take years to build up enough money but you have to start somewhere. If this is too daunting make the amount less so it is easier to achieve your goal and then slowly move up the amount over time.
Set up automatic deposits
By setting up automatic deposits to go into your emergency fund it makes it easy and makes sure that the money actually goes in. I used to set it up on my pay day so by the time I actually checked my account I did not even realise it had gone so it made little difference to me.
Find ways to boost it
The best thing you can do to get to your goal faster is to put any extra income straight into it. This might be bonuses or tax returns. You would be used to living off your regular income so you should not need this money.