Emergency funds: how much do you need and what is it for?
Any good financial plan starts with an emergency fund. To be truly secure, you need to be able to cope when life throws you a curveball, whether it’s a family emergency, your roof develops a leak or your partner loses their job.
How to build an emergency fund
You need to work out a realistic amount of money to set aside every month. What you don’t want to do is put money into a savings account and have to constantly dip into it.
A good way of setting aside emergency money is to set up a direct debit or standing order to take money from your account into a savings account – preferably just after payday. It’s harder to miss money if you weren’t ‘aware’ of it.
Make sure that the savings account you use has easy access. You don’t want to be waiting a week to get the funds to fix your vehicle.
What is an emergency fund for?
An emergency fund means you should never be panicking about where to find the money for unforeseen circumstances that need dealing with immediately. Examples include:
- Your car breaking down and needing repairs
- Your boiler needing replacement
- Getting emergency dental work (e.g. because of an infected tooth)
- Losing your job
- Getting less work, if you’re self-employed or on hourly wages
How much money should be in my emergency fund?
This comes down to some simple calculations. First, work out your basic outgoings each month: mortgage or rent, utilities, internet, food (maybe even a little for entertainment). Settle on an amount. Triple it, at least.
Three months’ outgoings is the minimum you should aim to keep in emergency. Six months is probably the maximum – any more than that and you’ll be missing out on interest from investing your cash elsewhere (see our other insight posts).
How high up my priority list should an emergency fund be?
Pretty high, but it’s not top priority. Don’t start putting money aside if it means you’re struggling to pay the bills, or to the detriment of paying down high-interest debt.
Helping employees to understand the need for an emergency fund rather than accumulating debt is a good step towards financially well, resilient and happy employees. Take a look at our Courses to see if your staff would benefit from learning more about saving for an emergency.