If you want to worry less about your finances, avoid debt and build wealth for the future it all starts with having an emergency fund.
And just to be clear what it pays for, Taylor Swift tickets not an emergency (even though FOMO might make us Swifties feel like it is), your car breaks down and you need it to get to work, emergency.
I’m going to take you through how much should be in your emergency fund, where to keep it (spoiler alert, please don’t keep it under your mattress) and how you can easily save for your emergency fund.
How much should be in your emergency fund?
So the big question is how much do you need set aside in case of an emergency?
Most financial experts suggest aiming for three to six months of your monthly essential expenses. These are the expenses you cannot avoid every month.
Say you spend $2,500 a month on your essentials, such as your rent, food, car, energy bills, then you need at least $7500 stashed away.
Sounds like a lot? Yes it is, especially when you look at the numbers for how many people actually have this kind of money saved.
The average total savings balance for people in the US is $8000, while in the UK the average adult has £11k in savings. But don’t forget that the very wealthy skew this figure, the people with millions in the bank. Remember, your emergency fund is just one savings pot, a healthy portfolio features other types of savings pots too.
So it might make you feel better to know 46% of people have £1k or less in savings. If you have £1k or more in savings, you’re doing quite well.
That recommendation that you need three months of expenses stashed away can also depend on your lifestyle of course. If you are very frugal, with a reliable car that does not cost much to run, or fix in a push, no mortgage, then the potential pressure on that emergency fund will be greatly reduced.
For those just getting started aim for your first $1000, then one month of your average expenses and go from there. You won’t be able to do this in a few weeks, but you can do this.
Save $1k quickly
One way to get your emergency fund in place fast is to try a savings challenge.
You can make it much easier with my savings challenges – one is an extreme challenge that would see you save $1,000 in 30 days. That may require some significant cuts to your expenditure but that doesn’t mean it isn’t possible!
The other is a challenge to save $1,000 in 90 days, which you may find more manageable.
Download the savings challenges with dollars here:
And you can find them with pounds here:
You can also check out these savings challenges for more ideas.
How to save for your emergency fund
Now you know the numbers involved, what can you actually do to build an emergency fund.
Break it down
Break it down into small steps, so let’s say you want your emergency fund in place in 24 months, you divide your total goal amount by 24. Say you want to get $7500 put away, that means you need to save $312.50 a month.
Is that achievable for you? If it isn’t that start with smaller, regular contributions. Even if you have to start small, the most important thing is that you start.
Automate savings
Now that you know how much you want to save every month, you can automate your savings.
It is so important you commit to this every month, because if it’s an afterthought at the end of the month the chances are you’ll spend it and miss the goal.
Set a realistic budget
Any good savings strategy involves setting a realistic budget you can stick to.
That starts with understanding how much you owe in debt such as credit cards and making a plan to pay that off, and figuring out what your monthly commitments are, such as mortgage, rent and insurance payments.
Understand how much money you spend every month on essentials and non essentials, so you can set a path for affording what you need to save every month.
So much of overspending is connected to not really being aware of how much money we have and what our monthly commitments are – like a big direct debt that comes out a week before payday.
Make changes to your budget to cut back on your expenses – you can do quick and easy things like axe subscriptions or get creative with saving on your energy bill and groceries.
Prioritise the things you actually need to spend money on, this doesn’t mean you stop spending on fun stuff like going out, it means you decide what you can afford to spend and you commit to no impulse spending.
One great way of cutting back can be to make a bit of a game out of it by challenging yourself to have a no spend week every single month. This is a week where you have no takeaways, you always take snacks and drinks out with you, you don’t buy anything new, and you find ways to entertain yourself for free. It forces you to get creative and it can be really fun.
Look at ways to boost your income
If you can’t find room in your budget to save then you need to look at how you could bring in more money. Start by decluttering your home and selling your stuff – this is often a quick way to bring in a few hundred in a matter of days.
For a lot of people that may be getting a promotion or pay rise at work or moving to a new job. Alternatively, think about a side hustle. A few hours of extra work a week could give you the amount you need to reach your emergency fund goal.
Consider looking for online freelance work – virtual assistant work has become huge over the last few years and you do not need a degree or special qualifications, just a laptop and appropriate knowledge in the area you want to help people with.
What is an emergency fund for?
We’ve established that concert tickets aren’t on the list. But what is it actually for?
There can be a misconception that the emergency fund is for annual expenses or paying for wants that come up at the last minute, such as the chance to go away for a holiday.
The money for those things comes from a different part of your budget.
The purpose of your emergency fund is to cover you in case the unexpected happens. Which it inevitably does.
Life is messy and there’s always something right around the corner that is going to cost you money to fix. You need dental work. The boiler packs in. You lose your job with very little notice. Worst case scenario is you get more than one at once.
The trouble is if you are living paycheck to paycheck and feeling broke at the end of every month, then it’s these emergencies that can push you into debt. That’s somewhere we do not want to be.
Debt inevitably spirals and it costs you more and more money thanks to the interest you may end up paying on the money you owe.
Your emergency fund may not be used for a year, or two. Lucky you if that’s the case. But you will be so glad you had it and it’s the foundation that will enable you to build wealth.
Once your emergency fund is in place, what you save after that is all savings for your future. Your emergency fund is safeguarding that pot of money for your future so you do not dip into it.
Your emergency fund pays for things that you have to pay for – healthcare, repairs, legal costs.
Where to put an emergency fund
Your emergency fund needs to be easily accessible so that you can get to it in an emergency.
However you don’t want to tie up potentially thousands in a low interest account. This is where it can get a little complicated and say you have hit an emergency fund worth three months of your expenses, maybe you want to stick a grand in an easy access account and the rest somewhere it can earn a decent rate of return but maybe has an annual limit on withdrawals. How this works really depends on you and your individual circvumstances.
When looking for where to put your fund the temptation may be to stick it in a jar in the cupboard or in a bag in the freezer. The best place for it is going to be a savings account where it earns interest but that does not penalise you for withdrawing your money.
Some accounts will have a penalty if you make one or more withdrawals before the end of the financial year. So find an account that’s flexible, which inevitably means less interest but try to shop around and don’t be afraid to move the money to a different account if you spot a better deal.
Your emergency fund is there to help you avoid debt and stress, but it’s your longer term savings – like your investments and pension – that are going to help you thrive in the future. The emergency fund is part of balancing your finances but not the whole picture.
So don’t allow your commitment to your emergency fund to lead you to neglect other crucial savings. This is a secret of the rich that we can learn from, they’re prepared for short term emergencies but they are diversifying where their money is to take advantage of long term growth.
Us Meer mortals have less money to play with than the super rich, but when you take the long view there’s still opportunities to grow your wealth, even if you can only put away $50 a month. For example, $50 a month spent on stuff means you have a lot of stuff. $50 a month in an investment account with a 6% return for 20 years means you have over $22,000.
Having that emergency fund in place means you avoid the pitfalls of debt and all the costs that brings with it. Its a slippery slope thanks to the high interest rates you may face with things like credit card debt, and it can trap you in a vicious cycle.
Your emergency fund helps you avoid debt, pay for unexpected costs without any stress and is a foundation you start from when it comes to building wealth.
Final thoughts
If you want more help with saving then check out these tips for frugal living and these tips for how to stop overspending.
