What are they?
An emergency fund is an account where you put money aside each month and this money is used for unexpected expenses. They are most commonly used so that people don’t have to fork out large sums of money when costs pop up, such as car repairs, unexpected vet bills, repairs needed in your home or even job loss. People create emergency funds because it gives them peace of mind knowing they have a cushion to fall back on if an unexpected cost arises. It prevents them from having to dip into their own money, putting them at a disadvantage by throwing them off track with their budget. Similarly, it prevents people from having to go into debt or even worse, use a high-interest credit card.
How to build one
1. Set a goal
The first thing you should do is set a goal and a date you want to reach that goal. This enables you to have something to aim towards and then you can figure out how much you need to be putting aside each month or week in order to attain it. Typically, people aim to achieve a goal between 6-12 months.
2. Automate your savings
The next step entails setting up a direct debit or recurring transfer into a savings account with your bank. By automating your savings, the money is being put aside without you having to do it yourself, meaning you are more likely to achieve your goal. Natwest has a digital regular saver account and Monzo has savings pots, meaning you can earn interest on your money without having to do anything - free money?! Don’t mind if we do 💪
3. Replenish, replenish, replenish
Whilst this might sound strange if an unexpected cost arises and you have to dip into your emergency fund, make sure to top it back up. This ensures that you have some form of financial cushion if any other unexpected costs arise. Whilst this might sound obvious, only use your savings for actual emergencies. No, unfortunately, going for a Nando’s after work to brighten up your day is (not) an emergency…