Should you have an emergency fund?
Published Tue, Mar 1, 2011 Updated Tue, Feb 16, 2021
Life is full of the unexpected. By having an emergency fund you can prevent yourself from being caught out and potentially avoid a financial disaster. Whether a medical emergency, house repairs, or redundancy, you can protect the future for yourself and your family by taking a few minor steps now.
An emergency fund should be built up regularly over time to contain around 6 months worth of you (or your family’s) expenditure. In cases where there is a surprise loss or reduction in income this will give you a significant recuperation period before falling into debt.
The thought of saving for an emergency may not seem significant if you have debt you are trying to clear but it is even more vital. If you suddenly lose your income, any missed debt repayments and bills will result in a very negative credit history that will impact drastically on future financial plans.
Knowing that you can cover all your repayments for at least 6 months is more beneficial than having cleared your debt and then being unable to pay your mortgage or bills.
How to start your emergency fund
Start your emergency fund by setting aside a small monthly sum that still allows you to make scheduled debt repayments. Small and manageable goals will keep you focused and motivated.
Open a dedicated savings account and decide on a set payment to be automatically taken from your current account each month on a certain date. In time you will start to consider this payment as a normal expense rather than emergency funds saving. It will become a habit to save and overtime you will adjust to your available money. Over time, stagger your payment schedule so that your monthly payments are slightly increased every so many months. This will ensure that your emergency fund pot increases quicker but your finances don’t noticeably suffer.
Open up an ISA
If you want to maximise the interest earned on your fund, open a tax-free savings ISA. You can save up to £20,000 tax free in an ISA each year. You are only allowed one ISA per person and your £20,000 per annum limit means that once you have saved £20,000 if you withdraw the cash from your ISA it cannot be returned.