Emergency Fund

What happens if your car fails its MOT? What happens if the boiler breaks? 

When disasters strike – how are you going to pay for it?

How much do you have in your savings to act as a cushion for when you need to pay out for something unexpected?

How big is that pot so you would not be financially jeopardised if you were hit with an expensive bill?

Interrogation over.

It is very important to ask yourself these questions and work out how much you actually have saved up.

Once you know that figure you will now either be reassured or break into a sweat.

If the latter happens then you need to start working on building up that savings pot.

Please read over my previous blog on budgeting to help you establish how much you could siphon off into your savings account per month.

2 Types of savings accounts

I like to separate my savings accounts into two.

GENERAL SAVINGS

This honey pot is for something that I might want to spend within the next 3 years.

You might have a particular item/experience in mind (car, holiday, new house etc) but the main function of this account is to be a reserve of cash for my general savings.

I don’t want to invest this money because the saying goes only invest money that you are not willing to touch for 5 or more years.

I keep the money saved in the UK Government-backed account : NS&I

Another important reason why I only want to save my money for about 3 years and no longer is because of inflation.

I sound like a broken record but I think inflation in its own right should get a whole blog post dedicated to it because it is (excluding tax) the biggest, most silent crippler of wealth and future returns.

Not to sound dramatic or anything…

Effectively, inflation reduces the purchasing power of your money over time so the same £1 coin today will buy you less in the future.

The Central Bank tries to keep it around 2% so do the maths:

The bank of my savings account offers me a pitiful 0.01% return on my money each year

Inflation erodes away at my wealth by 2% each year

(+)0.01% – 2% = (-)1.99%

Consequently, each year my money is decreasing by 1.99%……and the scary thing is, so many people do not realise it!

The overarching message here is: save but not for too long!

EMERGENCY FUND

My second savings account is reserved for emergencies only.

Inflation-riddled or not, it never moves from my savings account because I need it to be quick access if I ever required it.

I chose an account that allowed me: instant access and with no penalty fees for withdrawing any sum of money.

Once again, I would recommend moneysavingexpert.com to shop around and find the best savings account that meets your emergency fund criteria.

Keep it very separate from all your other accounts so that you are NEVER tempted to tap into it unless you absolutely have to.

It will help you sleep at night knowing that you always have that stash of cash to fall back on if s*** hits the fan.

Starting from Zero.

If you have no savings and need to start from zero then you need to get your priorities straight:

Pay off your debts first – ideally the loans that have the highest interest rates on them

Next, start to save as much as you can into your emergency fund

Once you have a sufficient amount in that emergency fund that you’re happy with then you can concentrate on the general savings account and investing.

I covered this in last week’s post.

How much do I need in my Emergency Fund?

Gosh, I’m so pleased you ask!!! That is next week’s topic……I know, I’m such a tease.

TO DO

Right, then. 

Your mission for this week is to do just one thing that you’ve taken away from this blog post.

I would suggest the following:

Open up a separate savings account 

Make a mental note that this is your emergency fund and should not be touched unless it is an emergency 

Then start piling as much money as you can muster each month into it over the next few months.

NEXT TIME

How your emergency fund and income protection come together.

HEALTH FACT 

There is more calcium in 3 florets of broccoli then 1 glass of full fat milk.

DISCLAIMER

This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.