One point that the current global situation has really driven home is the value of building up an emergency savings fund. The general guidance is to aim for a fund that could cover three to six months of essential spending – that’s your mortgage or rent, council tax and other bills, and basic food shopping. The money should be set aside in an easy access savings account so that you can get to it in case of a crisis.
Why have a separate fund for emergencies?
One of the key differences between your emergency fund and any other savings pots is the ease of access. This money shouldn’t be locked away in a high interest account, as you never know when you may need to access the cash in a hurry. This does mean that you need to have self-discipline, to avoid using the money unless you need it for a true essential. That’s why you might want to consider setting up an account with a bank that you don’t use for your everyday banking: out of sight, out of mind.
For those who are yet to start an emergency fund, it’s easy to get started – even if you don’t have much to set aside. Here’s an easy three step plan for starting out:
- Open a second bank account. As mentioned above, a second bank account will help you to keep your fund separate from the rest of your money. Choose one that offers a ‘save the change’ feature – and look into different switching benefits as you may be able to get cash for opening your new account. Be aware that opening a bank account usually involves a hard credit check.
- Once your bank is set up, open an easy access savings account with them. Make sure it’s one that gives you access to your savings instantly. Turn on the save the change (or ’round-up’) feature. This will help you to build your savings by rounding card purchases to the nearest pound and saving the difference.
- Set up an automatic monthly transfer for however much you can afford. Even ten pounds a month is better than nothing – although the more you can save, the quicker your fund will grow. If you’re able to set aside £125 per month, for instance, you would have £1500 in a year.
Prioritise emergency savings over non-essential debt repayment
If you have limited money left after your paycheque each month, then it can be difficult to know how best to use it. Debt repayments are obviously important – and you should always ensure that you’re meeting minimum repayments as the highest priority – however an emergency fund is just as vital in the long run.
Try to prioritise building your emergency fund until you can at least afford to cover three months of essentials. This will help you to avoid getting into further debt if you do run into a financial crisis. Once that money is in place, you can choose to prioritise other things if you wish to, such as overpaying on debts or saving for other things.
Know when to spend
There’s no point having an emergency fund if you’re too afraid to spend it when the time comes. One of the best pieces of advice we’ve read is not to feel bad that your emergency fund is lacking if you’ve needed to use it for actual emergencies: that’s what it’s there for.
Taking the current situation, people who no longer have a job or who have lost shifts due to the ongoing pandemic should absolutely consider dipping into their emergency savings to cover bills, food or other vital expenses if needed. In general, any time that you’re faced with absolutely essential spending that you can’t afford should be a time to consider dipping in to the savings.