Why You Need An Emergency Fund

I’m sure you are reading that title and thinking this is obvious and you would be right. There is nothing quite like a global pandemic of epic proportions or Wars to make some people realize how lucky they were to have an emergency fund.

Some people were not quite so lucky and had no savings or emergency funds and then were made redundant from their jobs. Others have lost loved ones due to the pandemic and then had added expenses they had no idea how to cover.

All in all, it has been a rough few years for nearly everyone. Some people have been affected worse than others, but everyone has felt the global pandemic’s impact.

Hopefully, we all managed to make our way through all of this and have come out stronger and maybe wiser.

So what is an Emergency Fund? How much should you have in your Emergency Fund and also where should you keep your Emergency Fund?

WHAT IS AN EMERGENCY FUND?

What is an emergency fund?
An Emergency Fund by definition is a readily available amount of cash designed for everyday people to help them navigate their way through any kind of financial dilemma.

This could be having to purchase new electrical goods such as a fridge freezer or cooker should they stop working. It could be to pay for a funeral unexpectedly or perhaps to get you through a month or two should you lose your main source of income.

The biggest financial dilemma and one which people can experience is the loss of employment or reduced hours at work.

The loss of a job is the biggest financial dilemma we could face and there will be more unemployment to come with the onset of AI etc.

This is where emergency fund savings come in very handy. They can help us keep afloat until our finances start to get better.

An emergency savings fund is essential for everyone and now because of the pandemic become more obvious for people to see.

Emergency funds can really help get you out of some sticky situations. I will tell you how they have helped me over the last few months.

HOW MUCH SHOULD I SAVE?

This is a good question. There is a good average amount for most people but what if you can’t save the average amount? Well, there are always areas you could cut back on and make some savings.

The average amount you should try and have in emergency funds is around 3 months’ salary. 6 Months salary is better.

You will need to work out exactly how much you need to live on as a minimum. No eating out no Netflix subscriptions we are talking bare bones. Mortgage/rent, Bills and food.

If you need £1500 per month then £4500 will be the minimum you would need.

£9000 would be more than ideal as that would be 6 months’ worth of expenses.

These amounts will cover you should you lose all your income. At the very least you then have 3 months’ worth of income in emergency funds.

This will allow you to have time to get a new job or some other form of income.

Obviously, the sooner you sort out your finances the better. Then you won’t have to use all of your emergency funds but it is nice to know they are there.

I do appreciate that 3 months of your salary as emergency funds can be difficult to save.

I only have around 2 month’s salary saved so believe me I do realise it is not an easy task.

Emergency Fund Calculators

There are various emergency fund calculator tools for you to use such as this one from HSBC.

This can help you work out the exact amount you may need to cover all of your expenses. It will also show how long it will take you to achieve this amount.

An emergency fund calculator is perfect if you are looking at cutting back on spending in order to reduce the amount you need to save for your emergency funds.

There are certain things you can cut back on though to make it easier to save. You can also earn extra money to put by.

Taking on overtime in your current job or working a couple of hours in the evening once or twice a week and putting that cash into your savings is a great way to see your emergency fund increase in size.

I use a mobile app called Plum. Plum is a great app designed to help you save in a variety of ways. Better yet it makes it super simple to understand.

I currently have my Plum app set up so it rounds up any money spent on my debit card. The extra gets put into my Plum savings. You will be surprised how much this is.

If I spend £3.45 in a local store Plum will round up to £4 and put the extra 55 pence into my savings. It is the easiest way to save.

You could also try cutting back on things you spend on yourself. Perhaps a weekly trip to the pub etc and put the money you would have spent to one side.

If the thought of saving money by cutting back on things you love makes you sweat don’t panic.

If you have at least one month’s savings this could be enough to get you out of a hole short term.

DONT IGNORE DEBT

Just a quick word of advice before you start saving your emergency funds. If you have store cards or loans or credit cards that still need paying off then it will be cheaper, in the long run, to sort these out first.

It is all very well having an emergency fund but if you are made redundant and some of your savings go on paying your cards off each month then it seems a little silly to me.

You will be far better off if you were to lose your job if you didn’t have these monthly debts in the first place.

Also, the APR is usually sky-high on most of these debts. If you have any of these kinds of debts then target your efforts on these, please.

HOW AN EMERGENCY FUND HELPED ME

Like I said at the beginning emergency funds are crucial and sometimes can be hard to come by which is why I only had two month’s worth of salary savings myself.

Like a lot of people around the world, I got furloughed from my full-time job. My job does require me to help keep key workers’ vehicles on the road. There just wasn’t enough work for all of us as there are 10 of us at my job.

So it was decided that teams of two would be furloughed. All in all, I was off work for 7 weeks.

During those 7 weeks, I managed to get a lot of stuff done around the house. I also spent some time in the garden as it was lovely weather for the most part.

The downside was on the days when I didnt feel much like moving very far from the sofa it led to me thinking about possible unemployment etc which was a sobering thought.

It was on one of these down days that I had that our fridge freezer decided to stop working. It was around 15 years old so we shouldn’t have been too surprised.

Luckily like I said we had emergency fund savings so it was no big deal. We went and purchased a brand-new one without any fuss.

This is the kind of ease with which emergency funds can help you. Having an emergency fund certainly helps you to sleep better at night.

WHERE TO KEEP YOUR EMERGENCY FUND?

The natural place you would think to keep savings is in a savings account or an ISA. In reality, none of these will give you the super quick access that you may need should there be any unexpected surprises with which this money will help bail you out

Regular savings accounts also usually have lots of rules you need to abide by such as putting in a set amount each month and only being able to make a certain amount of withdrawals each year which is why they are not the best account for emergency funds.

The best bet is to search out the highest-interest current accounts and transfer to a new account when you have a bit of a lump sum.

At the time of writing the Chip Banking App has a 4.84%apr on its instant access savings account. This is where I currently have mine. Interest is added monthly.

Chase Bank currently has a 5.1% interest savings account for its members. This does drop to 4.1% in January 2025 though so would be good for a short term before moving it if you need to.

When it comes to savings accounts check out Money Saving Expert’s current account advice which is up-to-date and gives you a lot more options.

SUMMARY:

As my wife once said from something she read somewhere “You are only 2 missed paychecks away from losing your home“.

Whether this is correct or not is not really the point I’m trying to make, I have simply added it as it should shock you into having a good think about whether you have any preparations for either a sudden expenditure you were not expecting or worse case you lose your income entirely.

I would love to hear in the comments about people’s various situations whether or not you have emergency funds and if not what you intend to do about it after reading this article.