This article was written by Andy, a personal finance blogger who writes about all things finance, from how to use a mortgage calculator to how to get the most out of your credit cards. Here he’s writing about emergency funds, enjoy.
At times of financial stress and hardship it is said that having an emergency fund as a source of backup cash is essential. It is said that in life we should always expect the unexpected and that is why having an emergency fund is so important.
When would you need to use your emergency fund?
Money emergencies can take all sorts of forms, from losing your job and having to cope until you find a new position, to your car breaking down. Having some extra cash in these sorts of situations where you have a loss of income can really make life easier.
If you don’t have an emergency fund in these situations, you may be forced to borrow money from elsewhere to help you through it. Borrowing money can simply compound the problem and it will most likely leave you in a much worse situation financially than when you started.
How much should you save for emergencies?
There is no set rule when it comes to the amount of money that you keep in your fund but it’s said that the recommended amount is a minimum of 3 months expenses. How much you actually keep in your fund depends entirely on you and how much you can afford to save.
How to start an emergency fund?
If you want to start your first ever emergency fund, it’s a good idea to try and start small, you don’t want to try and run before you can walk. A good way to start is to work out how much you can actually afford to put aside each month to build up your fund.
To start putting money aside you should work out a monthly budget of all your monthly income and expenditure. This should be pretty easy to do if you can collate around 3 months worth of bank statements.
Be consistent when you start saving.
Saving money becomes easier if you get into a sort of habit. Once you know how much you can afford to save you can put a set amount of money away each month. Once you’ve done that for a while you will start to do it without even realising it and it will get easier as the months
Where should you invest your money?
There’s little point in starting an emergency fund if you don’t intend to make the most of your money. The best way to make your money work for you is to invest your fund into an interest bearing bank account, over time your fund will grow on its own if you find one with a competitive interest rate.
One thing to remember is not to invest your fund into something like a 3 year savings bond, because you won’t be able to access your money for that 3 year period and you need your money to be easily accessible.