Your Emergency Fund

What Is An Emergency Fund?

It's an amount of money that you have easy access to in case of an emergency (I like the name, it does what it says on the tin…). It’s not for planned spending or treats - it’s for when life throws you something genuinely unexpected.

What Sort Of Emergency?

There are really two main types of emergencies:

1). If something goes wrong in the house, or your life - you need a new fridge, you need to visit a dying relative, you need to escape an abuse situation.

2). You lose your source of income and need money to live on until you can get another.

How Much Should It Be?

That's going to depend on your circumstances but the first thing that I want to say always, is that, something is better than nothing.

You might not reach your goal about for months or even years, but if your oven breaks just before Christmas, it would be ideal to have the full amount ready to buy a new one, but even if you have 50% of the price saved and you have to borrow the rest then you're in a much better position than you would have been.

So the general rule is around 3-9 months of your expenses.

Expenses are not income - you don't need 3-9 months of your salary - but rather of the things that you would have to pay out even if no money comes in. So rent, electricity, water, council tax, food but also realistically, phone and internet - in this day and age, how would you find a job, do your banking, speak to Universal Credit if you didn't have access to the internet?

Whether you go closer to the three months or the nine months is a blending of your circumstances and your risk tolerance. You will want to take into account any insurances that you have - like income protection or mortgage insurance. Also whether you have a partner with a second income, lots of discretionary expenses which could be cut, or dependents.

Generally, if you’re self-employed, the advice is to aim towards the higher end of that scale (although, in my experience self-employed people have the ability to magic up money much more easily than employed people…). If you have a stable job, you'll be aiming at the lower end.

How Do You Work Out Your Expenses?

Simply, with your bank statement. You'll go through and add up what you're spending month by month and take an average from that.

Where Should I Save It?

In the highest interest, easy-access account that you can find.

Easy access means that you can get at it instantly, with a card or by transferring straight into your account. The focus needs to be on the ease of access, this money isn't going to be growing in particular (that's what your investments are for) but there's no need for it to sit at 0% either - get the best deal that you can but with super easy access. And feel free to flit around to take advantage of any offers!

You do want it separate from your main money, a whole separate account or maybe the 'spaces' or 'pots' that some banks offer. You need to know the job it's doing, so you don't get it mixed up. It also adds a little friction when you come to use it - is this truly an emergency?

When Do I Use It?

In an emergency.

You get to define what that is. If you're worried whether you'll know, you could have a think beforehand and write down some situations that might come up or have done in the past for you or for people you know. You can trust yourself to know.

But you must use it if you need it! It's quite a common issue for people to feel precious about the money. Especially if it's been a struggle to save it up. It's there for an emergency but it's also there to be used. This doesn't have to be a life or death situation, it could be the oven breaking on the 22nd of December (yes, that happened to me…)

One of the main reasons to have an emergency fund, is to soothe your soul. To make it feel safe to invest money to grow wealth for the long term. If you know that you've got yourself covered then you should feel more confident locking money away for the 10+ years that investing requires. This is you, caring for you.

How Do I Save It?

In the same way you save for other things.

You might already have money which is sort of earmarked - spend a little time making it official and thinking about your 'rules'.

Or you might be starting at £0 and need to take your time, building it bit by bit. Ask for money instead of gifts, give something up and redirect the money, sell some unwanted bits.

As always, you're worth paying first so when your wages come in, whack a tenner over before you even think about it (or better yet, automate it).

Like we said above, something is better than nothing. According to recent FCA data, one in ten people have no cash savings - so if you have £10 then you're ahead! A further 21% have less than £1,000.

My first goal was to get £1,000 in my fund and when I reached it I redirected my automated payment that month to a massage. Got straight back to it the month after mind, because emergencies don't care for how supple my back is. Sadly.

Why Don't People Want To Call It An Emergency Fund?

There is a move away from calling it an emergency fund, I think the idea is it makes people feel stressed which I get. But having no money in an emergency is probably more stressful, in my humble opinion.

There's a trend towards personalising your money stuff. I'm all for that, if it helps you to call it a 'fuck off fund', a 'freedom fund', 'cash buffer' or 'safety net', absolutely go for it.

Emergency funds are a really important part of personal financial resilience - it means you won't be paying wild credit card fees, or going without food in an emergency but it also means you can relax into longer term strategies knowing you've got yourself covered. So, call it whatever you want, do whatever it takes to get yourself there.

Next blog we talk about defining a personal a 'broke amount' and this week's newsletter ties it all up.

Love Eleanor. xxx