Is an emergency fund a good idea?

Setting aside money for a rainy day can help tide you over in difficult times and provide some financial security when you need it most. This is money you save to pay for the unexpected, whether that’s a bill you hadn’t planned for or a change in your circumstances such as if you lose your job or are unable to work due to illness. This cash is often called rainy day money.

Having money set aside for emergencies, you’re far less likely to experience financial difficulties or have to borrow at a high interest rate if things go wrong or your circumstances change. Knowing you’ve got some money tucked away might help you sleep better at night too.

How much do you need?

This depends on several things such as your circumstances, the sorts of emergencies you might face and how much insurance protection you already have.

For example, someone with a family, mortgage and loans are likely to need a larger emergency fund than a single person with no children who lives in rented accommodation and has no debts. This is because they have more financial responsibilities and dependants to look after. That's not to say that if you're single with no dependants you don't need an emergency fund. Everyone should keep some spare money available - it's just a question of how much.

If you have insurance to cover certain losses or expenses, this might affect how much you need in your emergency fund. For example, you may have house, car or dental insurance which would cover you for some emergencies and expensive bills. Or you may have insurance which would provide you with an income or pay some of your bills if you lost your job or were unable to work due to illness. In these cases, you might only need enough in your emergency fund to tide you over until these payments kicked in.

The general advice is to have enough money in your emergency fund to cover your expenses for at least three months. If this seems like a daunting amount to aim for, don’t be put off. Remember that having some savings, however small, is better than having nothing.

How to build an emergency fund

Saving regularly is a good way to build up an emergency fund. You’ll find that if you get into the habit of saving each month your savings will soon mount up.

Tips to help you save

  • Make it simple: Set up a monthly transfer so that money is automatically taken from your current account and put into a savings account.
  • Time it right: Set the transfer so it goes out of your bank account straight after you get paid or get your pension or benefits.
  • Keep your savings separate: By keeping your savings in a separate account from your everyday spending you’ll be less tempted to spend them.
  • Check your spending: If you don’t think you can afford to save, try closely monitoring your spending for a month or two. You may find areas you can cut back on. If you haven’t reviewed your bills like your house and car insurance or your energy or mobile phone deal recently, you may be able to free-up money by switching to a cheaper deal.
  • Save first: If you get a pay rise, think about saving some of it before you get used to having the extra cash

Where to keep your rainy-day money?

Regardless of how many emergency funds you choose to have, the money should always be easily accessible such as in an easy access savings account or instant-access cash ISA. Avoid accounts where you must give a long period of notice to take your money out.

What if I’ve got debts, should I still save?

It depends on what kind of debts you have. If your debts are manageable and low cost, this shouldn’t hold you back from starting a rainy-day fund. Having some savings set aside will mean you won’t have to fall back on expensive borrowing if you do have an unexpected expense.

If you’ve got expensive debts such as credit card or overdraft debt, arrears on your mortgage or a payday loan, you might want to think about using any spare money you have to pay off these first.

 

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.

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