We’ve all experienced unexpected financial emergencies - a bender, an unexpected medical bill, a broken appliance, a loss of income, or even a damaged cell phone, loss of a loved one, non-payment of your salaries, etc. Large or small, these unplanned expenses pr financial emergencies often feel like they hit at the worst times.
Setting up a dedicated savings or emergency fund is one essential way to protect yourself, and it’s one of the first steps you can take to start saving. By putting money aside - even a small amount - for these unplanned expenses, you’re able to recover quicker and get back on track towards reaching your larger savings goals.
Generally, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending
A. WHAT IS AN EMERGENCY FUND?
An emergency fund, also known as a contingency fund, is a readily-accessible cash reserve set aside as a financial safety net for future mishaps or unexpected expenses.
B. WHY DO I NEED IT?
Without savings, a financial shock, even minor - could set you back, and if it turns into debt, it can potentially have a lasting impact.
Research suggests that individuals who struggle to recover from a financial shock have less savings to help protect against a future emergency. They may rely on credit cards or loans, which can lead to debt that’s generally harder to pay off. They may also pull from other savings, like retirement funds, to cover these costs.
C. HOW MUCH DO I NEED IN IT?
The amount you need to have in an emergency savings fund depends on your situation. Think about the most common kind of unexpected expenses you’ve had in the past and how much they cost. This may help you set a goal for how much you want to have set aside.
If you’re living paycheck to paycheck or don’t get paid the same amount each week or month, putting any money aside can feel difficult. But, even a small amount can provide some financial security.
D. HOW DO I BUILD IT?
There are different strategies to get your savings started. These strategies cover a range of situations, including if you have a limited ability to save or if your wages or salaries or income tends to fluctuate.
It may be that you could use all of these strategies, but if you have a limited ability to save, managing your cash flow or putting away a portion of your tax refund are the easiest ways to get started.
Strategy Option 1: Create A Savings Habit.
Building a savings of any size is easier when you’re able to consistently put money away. It’s one of the fastest ways to see it grow. If you’re not in a regular practice of saving, there are a few key principles to creating and sticking to a savings habit.
i. Set a goal.
Having a specific goal for your savings can help you stay motivated. Establishing your emergency fund may be that achievable goal that helps you stay on track, especially when you’re initially getting started. Use our savings planning tool to calculate how long it’ll take you to reach your goal, based on how much and how often you’re able to put money away.
ii. Create a system for making consistent contributions.
There are a number of different ways to save, and as you’ll read below, setting up automatic recurring transfers is often one of the easiest. It may also be that you put a specific amount of cash aside each day, week, or payday period. Aim to make it a specific amount, and if you can occasionally afford to do more, you’ll watch your savings grow even faster.
iii. Regularly monitor your progress.
Find a way to regularly check your savings. Whether it’s an automatic notification of your account balance or writing down a running total of your contributions, finding a way to watch your progress can offer gratification and encouragement to keep going.
iv. Celebrate your successes.
If you’re sticking with your savings habit, don’t miss the opportunity to recognize what you’ve accomplished. Find a few ways that you can treat yourself, and if you’ve reached your goal, set your next one.
Strategy Option 1 Key Takeaways
This option is helpful to just about Anyone, but particularly those with consistent income. If you know you have a regular paycheck or money consistently coming in, you can create a habit to put some of that money towards an emergency savings fund.
E. WHERE SHOULD I KEEP IT?
Where you put your emergency fund depends on your situation. You want to make sure this fund is safe, accessible, and in a place where you’re not tempted to spend it on non-emergencies.
Here are a few options for where to put your emergency savings, and you can choose the one that makes the most sense for you:
- Savings Bank account: If you have an account with a traditional universal bank, and not with savings & loans companies or microfinance companies. Regulated banks are generally considered one of the safest places to put your money - it might make sense to have a dedicated account where you can keep and maintain these funds.
It's important not to store more than the maximum threshold covered by the deposit insurance with any traditional bank.
- Prepaid card: A prepaid card is a card that you can load money onto. It’s not connected with a bank or credit union, and you can only spend the amount that’s on your card.
- Mobile Money Wallets: This requires discipline
- Cash: Another option is keeping money on hand for emergencies, either in your home or with a trusted family member or friend. Keep in mind that cash can be stolen, lost, or destroyed.
You can change your smaller smaller note physically cash (£5, £10, £20 or £50) into £100 notes.
- Rental Income: When your emergency funds grow to become substantial (beyond £50,000), invest every excess in rental accommodation.
F. WHEN SHOULD I USE IT?
Set some guidelines for yourself on what constitutes an emergency or unplanned expense. Not every unexpected expense is a dire emergency but try to stay consistent. Even if it’s not a trip to the emergency room, you may need it to pay for a medical bill that wasn’t covered by insurance.
Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses, your one-time emergency expense may grow significantly larger than your original bill because of interest and fees.
However, don’t be afraid to use it if you need it. If you spend down what’s in your emergency savings, just work to build it up again. Practicing your savings skills over time will make this easier.
G. WHAT'S NOT AN EMERGENCY
You should be very wary of not spending your emergency fund on non-emergencies, including:
- Spending on wants
- lending to a family or friend
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