Why an emergency fund is more important than you think

Life has a way of testing people. Especially when it comes to money.

One minute you’re happily minding your own business; the next, you need to find money to cover something unexpected.

Like the chimney falls off the roof.

Your car needs major repairs.

Or a vet bill adds up to thousands of pounds.

How would you cope in those situations?

A lot of people would have little choice but to turn to their credit card, which could put them in a difficult situation – potentially for a long time. Others would have the savings at hand and could cover the bill without needing to worry.

This is where an emergency fund is useful. Unlike savings for the next holiday, it’s a cushion to protect you when something catastrophic happens.

No one knows when something unexpected will happen, but it will at some point. You can prepare for that inevitability so you’re ready, and we’ve put a short Q&A together below to cover the fundamentals.

How big should an emergency fund be?

There’s no specific figure for this, as it really depends on your situation. A common aim is for between three and six months’ worth of expenses (not earnings), so if you lost your job you could pay the bills while you look for something else.

Ultimately it comes down to what you’re comfortable with – some people prefer the security of a larger fund, others are happy to have a smaller one that will help them through the worst.

How do I build it?

The simple answer is to make it a priority rather than a second thought. Instead of upgrading your phone, add to your fund. If you save money by reducing your insurance premiums or broadband price, put the difference into your savings each month.

You may also build it faster by setting a target, like completing it by a specific date. That should make it easier to tuck large sums away, as you know it’s temporary. With no target date it can feel like it’ll take forever – and that’s when it can be tempting to give up.

What’s it for?

Having built an emergency fund, ideally it would stay untouched for as long as possible. The purpose of this is to be there when you really need it, so the longer you can go without dipping into it, the better. This fund isn’t for everything, it’s for essentials that you don’t have any other money for, like:

  • Paying the bills if you lose your job
  • Essential home repairs e.g. the roof collapses
  • Major car repairs
  • Dental treatment
  • New boiler
  • House needs rewiring

So what isn’t it for?

When it comes to what an emergency fund can be used for, the clue is really in the name: emergencies. It isn’t there as an extra savings account, and using it frivolously could mean it’s not there when you really need it. Specifically, try not to waste it on things like:

  • Buying a new car
  • Takeaways/nights out
  • Holidays
  • Gifts (including Christmas and birthdays)
  • A new phone

Get comfortable

Imagine how it would feel knowing that you’ve got that security, forever. Safe in the knowledge that if something disastrous happened you have a financial cushion to make things easier, instead of panicking about how to deal with it and racking up debt with loans and credit cards.

That’s what an emergency fund can offer, and once it’s there you’ll probably wonder how you ever managed without it.

Has an emergency fund come to your rescue? Or do you have any other tips for building that one? Let us know in the comments. 

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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